Institutional Equity Research Aviation

1

Research Analyst: Mitul Shah

Contact: (022) 4303 4628 / 9869253554 Email: [email protected]

Research Associate:Sheryl Fernandes

Contact: (022) 4303 4628 / 8879415031Email: [email protected]

Key Highlights: f Indian domestic aviation sector – which clocked 18% CAGR over FY14-19 – was impacted in

FY20 and FY21 due to COVID-19 pandemic. Looking ahead, we expect overall air passenger traffic to record a phenomenal 30% CAGR over FY21-FY26E, due to low base and expected strong revival. Air passenger traffic growth has a strong co-relation with GDP growth with a 1.5x multiplier. With GDP growth expected at ~7% over a long-run, the aviation industry is expected to record double-digit growth of 12-13% over the next decade. We expect the industry to stage strong bounce-back in the post pandemic scenario on lower base. Therefore, we expect air passenger traffic to record 64% growth in FY22E followed by 76% and 9% growth in FY23E and FY24E, respectively.

f Average air fare/km, which fell by 11% over FY14-FY20, resulted in decline in average air fare – as a percentage of per capita – declining from 5.5% to 3% over FY14-FY20 leading to better affordability.

f Considering reducing differential between rail fare and air fare, massive shift from rail to air travel expected over next decade. This would also lead to steady improvement in pricing power.

f Over FY06-FY21, the LCCs gained market share by 24 percentage points (accounting for 85% of domestic aviation market in FY21), which supported increase in PLF of industry.

f Higher PLF and control on cost would expand operating margin of the aviation companies. Other cost control parameters like increasing block hours, reducing ownership cost/ASK by increasing owned aircrafts and introduction of new aircraft with more seats per aircraft and ~10-15% better fuel efficiency would drive their profitability.

ESG Analysis: Analyzing InterGlobe Aviation (INDIGO) and SpiceJet (SJET) on 20 key criteria under ESG Matrix, we have assigned an overall score of 68% and 62% to INDIGO and SJET, respectively. Under “Environmental Head”, we have assigned 54%/54% score to INDIGO/SJET, as they emit radiation and consume conventional fuel, which pose a great danger to the environment. Under “Social Head”, we have assigned 73%/60% score to INDIGO/SJET. Under “Governance Head”, we have assigned 77%/73% score to INDIGO/SJET (please refer to page no. 5 for detailed ESG analysis).

Initiate Coverage on Aviation Sector with POSITIVE View

Considering strong revival from pandemic, rapidly increasing airfare (yield), likely healthy double-digit traffic growth for aviation sector over the next 5 years, margin expansion from current level, rising international base of Indian airline companies and valuation comfort, we initiate coverage on aviation sector with a positive view. We initiate coverage on INDIGO and SJET with BUY and 2-Year Target Price of Rs2,750 and Rs105, respectively. We prefer INDIGO, as it is the dominant player with the lowest cost/ASK in the industry and enjoys >50% market share currently. The stock currently trades at attractive valuation of 6.1x EV/EBITDAR FY24E.

Coverage Summary

Company Rating CMP

(Rs)

2 Yr TP

(Rs)

Upside

(%)

IndiGo BUY 1,975 2,750 39.0

SpiceJet BUY 75 105 39.0

Price Performance

Mkt. Cap. Absolute Perfromance

Company (Rsbn) 1 M 3 M 12 M

IndiGo 760 4.2 15.0 55.6

SpiceJet 45 4.1 (6.2) 49.2

AviationSector Initiation | 4 October 2021Institutional Equity Research

Strong Bounce Back in Air Passenger Traffic - the Key Catalyst

Key Sectoral Tailwinds:

Air passenger traffic is expected to clock 30% CAGR over the next 5 years

Expected strong rebound in air passenger traffic in 2HFY22E post pandemic – the single biggest catalyst over near term

Low penetration and changing preference for travel are the key boosters

Rising affordability, focus on comfort and increasing tourism to fuel demand

Increasing market share of Low-Cost Carriers (LCCs) and better cost control to drive margin

Key Financials and ValuationCompany Reco CMP* 2 Yr TP Up/ Revenue (Rs mn) EBITDAR (Rs mn) PAT (Rs mn) EV/EBITDAR (x)

(Rs) (Rs) (%) FY21 FY22E FY23E FY24E FY21 FY22E FY23E FY24E FY21 FY22E FY23E FY24E FY21 FY22E FY23E FY24E

IndiGo BUY 1,975 2,750 39 1,46,406 2,11,272 4,10,977 5,54,920 2,550 (2,824) 89,630 1,57,990 (58,298) (63,335) 21,009 63,978 370.9 (351.8) 11.5 6.1

SpiceJet BUY 75 105 39 51,334 58,424 1,08,012 1,45,394 4,228 1,394 25,958 31,111 (9,983) (11,347) 3,299 4,230 32.2 86.6 5.1 3.9

Source: Company, RSec Research; Note: * CMP as on 1 October 2021

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Table of Contents

Content Page No.

f Our Thesis ........................................................................................................................................... 3

f Investment Decision Matrix (IDM) ...................................................................................................... 4

f Environmental Social Governance Matrix (ESGM) ............................................................................. 5

f Channel Check Takeaways ................................................................................................................ 6

f Comparative analysis ........................................................................................................................ 7

f Sector At a Glance .............................................................................................................................. 8

f Key Sectoral Dynamics – At a Glance ............................................................................................... 9-16

f Sensitivity Analysis (FY24) ................................................................................................................... 17

Company Section 18-55

InterGlobe Aviation ................................................................................................................................... 19-38

SpiceJet ..................................................................................................................................................... 39-55

3

Our Thesis

Aviation Sector

Key Sectoral Theme

Air

Pass

enge

r Tra

ffic

f Air Passenger Traffic is Expected to Clock 30% CAGR over FY21-FY26E: Domestic air passenger traffic clocked 12% CAGR over FY10-20 on the back of opening up of economy, increasing business activities, availability of more routes and rising affordability. The recent change in consumer behaviour in terms of preference for comfort over cost benefit has been playing important role in tours and travel industry. Therefore, we expect air passenger traffic to record marginally better growth in next decade over the last decade. We expect domestic/international air passenger traffic to clock 28%/46% CAGR over FY21-FY26E. Accordingly, we estimate overall Indian aviation industry to clock 30% CAGR over FY21-FY26E due to low base led by pandemic-led disruptions. At a per capita level of US$4,000 (on PPP basis), the industry attains its inflection point based on historical trend observed in key global economies. India had already observed this inflection point in 2010 and accordingly recorded double-digit 11% CAGR in air passenger traffic over 2010-2020. Moreover, China’s per capita GDP was US$6,811 (on PPP basis) in 2007 (compared to India’s per capita GDP of US$6,997 (on PPP basis) in 2019), since then China’s air passenger traffic clocked 11% CAGR till 2019. Similarly, we see healthy air traffic growth over next decade in India.

f Domestic Aviation is Primarily an LCC Industry Now: The LCCs have been gaining market share in India over the years, which stood at 85% in FY21. Notably, their share improved from 60% in FY06 to 85% in FY21. Generally, they attract higher passengers due to low cost, which results into higher PLF. Thus, rising share of LCC transforms into higher PLF for the industry as well. PLF in domestic segment improved from 68% to 88% over FY06-FY20. Over the last five years, PLF of LCCs were 6.1% pts higher than for Full-Service Carriers (FSCs). Over a period, the LCCs have emerged as winners, while FSCs are finding tough to sail through. It is also implied that FSCs with business class is not profitable business franchise. We expect the LCCs’ market share to rise further over the next 2-3 years.

f Increasing Active Hours/Day to Drive Profitability: An aircraft, which is active for longer hours per day can generate proportionately higher sales and reduces ownership cost/ASK, providing cost advantage. Lease rent has fixed as well as variable component based on usage. The fixed component is ~60% for Indian aviation companies. Thus, an airline can reduce ownership cost/ASK by higher sweating of asset. Longer flights with addition of new international routes and reducing the time gap with proper planning slots at busy airports with concentrated operations can reduce downtime and improve active hours. This directly translates into profitability with proportionately higher revenue. Moreover, it also reduces fuel expenses by lowering idle flying due to airport traffic/congestion.

f LCCs Enjoy Lower Fuel Cost/ASK due to More Seats & Fuel-efficient Aircrafts: Fuel cost/ASK is broadly similar across 3 major airlines despite the cost of Aviation Turbine Fuel (ATF) for international airlines i.e. Air India is much lower than that of domestic airlines (INDIGO & SJET). The LCCs with only economy class have 20-25 more seats on the same aircraft than FSCs with additional business class, reducing fuel cost/ASK by ~11-15%. Moreover, recently these companies are replacing/adding new aircraft with better fuel-efficient engines (having 13-15% more fuel efficiency), which has direct positive impact on their profitability.

f Sharp rise in crude prices f Depreciation of INR f Slower-than-expected growth in air passenger traffic due to adverse macroeconomic scenario f Major disruption similar to COVID-led lockdown/restriction

Key Risks

Domestic Air Passenger Traffic Over a Decade International Air Passenger Traffic Over a Decade

5461 58 61

7086

104

124

141 142

54

85

147159

0

20

40

60

80

100

120

140

160

180

FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22E FY23E FY24E

(mn

)

Domestic Air Passenger Traffic

Domestic Air Passenger Traffic

1314

1214

1719

21

2426

23

5

12

24

27

0

5

10

15

20

25

30


(mn

)

International Air Passenger Traffic

International Air Passenger Traffic

54mn (FY21) - 91% 5mn (FY21) - 9%

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Parameters IndiGo SpiceJet

Score Risk Score Risk

Management Quality 7 Low 6 Low

Promoter's Holding Pledge 9 Low 2 High

Board of Directors Profile 8 Low 6 Low

Industry Growth 8 Low 8 Low

Regulatory Environment / Risk 3 High 3 High

Entry Barriers / Competition 7 Low 6 Low

New Business/Client Potential 7 Low 8 Low

Business Diversification 6 Low 8 Low

Market Share Potential 9 Low 7 Low

Margin Expansion Potential 7 Low 8 Low

Earning Growth 8 Low 8 Low

Balance Sheet Strength 3 High 2 High

Debt Profile 2 High 1 HIgh

FCF Generation 3 High 2 High

Dividend Policy 1 High 1 High

Total Score Out of 150 88 76

Total Score (%) 59% Low 51% Low

Investment Decision Matrix (IDM)

5

Environmental, Social & Governance Matrix (ESGM)Parameters IndiGo SpiceJet

Score Risk Score Risk

Environment

Climate Change and Carbon Emissions 4 High 4 High

Air & Water Pollution 3 High 4 High

Biodiversity 6 Low 6 Low

Deforestation 2 High 2 High

Energy Efficiency 7 Low 6 Low

Waste Management 6 Low 6 Low

Defence / Arms / Ammunition Exposure 10 Low 10 Low

Social

Customer Satisfaction 9 Low 6 Low

Data Protection & Privacy 8 Low 8 Low

Gender & Diversity 8 Low 8 Low

Employee Engagement 7 Low 7 Low

Community Relations / Service 6 Low 4 High

Human Rights 7 Low 6 Low

Labor Standard 6 Low 3 High

Governance

Audit Committee Structure 5 Medium 5 Medium

Bribery & Corruption 8 Low 7 Low

Executive Compensation 9 Low 7 Low

Lobbying 9 Low 9 Low

Political Contribution 8 Low 8 Low

Whistleblower Schemes 8 Low 8 Low

Total Score Out of 200 136 124

Total Score (%) 68% Low 62% Low

6

Channel Check Takeaways

We had a series of discussions/interactions with several industry experts and few stakeholders including travel agents, tour operators and online travel booking companies.

f During the last one and a half months, overall enquiry level has gone up significantly (up 100% from Apr-May level), though it is 20% below Nov’20-Feb’21 level. Whilst the demand situation is improving gradually, it is still 20% lower than pre-COVID level.

f Business travel is also steadily picking up albeit at lower pace compared to pre-COVID level. Currently, business travel form just 25-30% of normal level, which the industry experts expect to increase to 40-50% in 2HFY22E with increasing vaccination drive. However, it may not reach the previous peak level in next 1-2 years, due to change in work structure amid work from home (WFH) concept at present.

f Demand for leisure travels through airways is expected to grow significantly over the next 5 years, as the price gap between air travel and III-tier AC ticket has narrowed down. Moreover, consumer aspiration and affordability have been driving the demand for air travel since last 3-4 years.

f Limited railway ticket availability during the peak seasons and hassles in booking tickets have been driving the demand for air travel for the customers in Tier-I/II cities. Notably, the recent pick-up in demand (excluding COVID period) emanated from Tier-III/IV cities.

f Strong up-tick in travels is expected in next 1 year, as the consumers appear to be desperate for travel after being at home for over 1 year in depressing environment along with rapid vaccination coverage. Sudden spurt in demand may result in capacity constraint for few routes in 2HFY22, which is expected to aid the pricing power of these players.

f Overall air passenger traffic should grow in double-digit over the long-term in line with the historical trend.

7

IndiGo SpiceJet Go First

Business

IndiGo is India’s largest passenger airline with a domestic market share of 53% (based on RPK) as of FY21-end. It primarily operates in India’s domestic air travel market as an LCC with focus on three pillars: (1) low fares; (2) on-time services; (3) courteous and hassle-free experience.

SpiceJet is India’s one of the preferred low-cost airline making flying affordable. It offers various customer services, loyalty programmes and value-added services. It is India’s largest cargo operator and largest passenger airline in terms of regional connectivity. It also operates as an LCC.

Go First is an LCC with affordable airfares. It operates business on three basic principles: (1) punctuality; (2) affordability; and (3) convenience. Go First is positioned as “the Smart People's Airline”. Its network is spread across major cities in India and overseas.

Year of Commencement 4th August 2006 18th May 2005 4th November 2005

Business Revenue Break-up (FY20)

f Passenger: Rs338.4bn f Ancillary (Cargo): Rs10.4bn f Ancillary (Non-Cargo):

Rs4.8bn f Others: Rs3.9bn

f Passenger: Rs114.4bn f Cargo: Rs5.4bn f Others: Rs3.7bn

f Passenger: Rs61.9bn f Ancillary (Cargo): Rs1.2bn f Ancillary (Non-Cargo):

Rs3.9bn f Others: Rs3.4bn

Total Passenger Carried (FY20) 75.5mn 25.8mn 16.2mn

Fleet Size

It had a peak fleet of 287 as of 3QFY21. However, due to pandemic, it declined to 277 in 1QFY22 including 122 A320 NEOs, 85 A320 CEOs, 29 ATRs and 41 A321 NEOs.

Fleet comprises of 113 aircrafts including 81 Boeing 737 and Max, 32 Q400 as of 31st March 2020. Overall fleet strength reduced to <50 currently due to ongoing pandemic.

Fleet comprises of 56 Airbus A320 aircraft as of FY20. Latest details not available.

Routes Operated (as of 31st March 2020)

86 (62 domestic and 24 international)

Passenger: 57 (47 domestic and 10 international)Cargo: 107 (63 domestic and 44 international)

39 destinations (29 domestic and 10 international)

Domestic Market Share – based on RPK (FY21)

53% 14% 8%

Management Quality

Most capable management in terms of decision making and handling pandemic wisely. Maintained consistency in performance to greater extent.

Good quality management to handle tough situation but it lacks consistent performance.

Good quality management to handle pandemic with decent business performance over the years.

Comparative Analysis

Y/E Mar (Rs mn)IndiGo SpiceJet Go First

FY18 FY19 FY20 FY18 FY19 FY20 FY18 FY19 FY20

Revenue 2,30,209 2,84,968 3,57,560 77,557 91,133 1,23,586 44,770 57,887 70,516

EBITDA 29,565 (2,054) 40,382 7,575 (99) 4,965 10,243 9,420 3,392

EBITDAR 65,667 36,556 45,348 17,896 12,869 8,594 10,243 9,494 4,080

PBT 31,267 (1,490) (2,751) 5,667 (3,161) (9,347) (371) (7,179) (18,769)

PAT 22,424 1,561 (2,482) 5,667 (3,161) (9,348) (312) (3,866) (12,707)

Growth (%)

Revenue 23.9 23.8 25.5 25.3 17.5 35.6 NA 29.3 21.8

EBITDA 37.9 NA NA 39.7 NA NA NA (8.0) (64.0)

EBITDAR 24.6 (44.3) 24.1 19.1 (28.1) (33.2) NA (7.3) (57.0)

PBT 45.8 NA NA 60.2 NA NA NA NA NA

PAT 35.1 (93.0) NA 60.2 NA NA NA NA NA

Margin (%)

EBITDAR Margin 28.5 12.8 12.7 23.1 14.1 7.0 22.9 16.4 5.8

NPM 9.7 0.5 (0.7) 7.31 (3.5) (7.6) (0.7) (6.7) (18.0)

Source: Company, Note: We have not included FY21 financials as the numbers were distorted due to pandemic; NA: Not Applicable

8

Sector At a Glance

Key ChartsExhibit 1: Domestic and International Air Passenger Traffic Growth over the Years

Source: DGCA

Exhibit 2: Air Passenger Traffic growth vs. GDP Growth & GDP Per Capita growth

Source: DGCA, World Bank

Exhibit 3: Domestic Aviation Market Shares over the Years (Based on RPK)

Source: DGCA

Exhibit 4: Brent Crude vs. Indian ATF Prices & Fuel Cost/ASK of INDIGO and SJET

Source: Company, RSec Research

f Air passenger traffic clocked 11% CAGR over FY10-20 on the back of opening up of economy, increasing business activities, availability of more routes and rising affordability. Looking ahead, we expect overall air passenger traffic to record a phenomenal 30% CAGR over FY21-FY26E, due to low base and expected strong revival.

f Air passenger traffic growth has a strong co-relation with GDP growth with a 1.5x multiplier. With GDP growth expected at ~7% over a long-run, the aviation industry is expected to record double-digit growth of 12-13% over the next decade.

Exhibit 5: PAT of INDIGO & SJET over the Last 10 Years


f Higher market share gain helps the companies on margin and profitability front. We believe that INDIGO would outpace the industry growth on the back of market share gain and higher growth in international segment.

f Crude price movement has high bearings on CASK and profitability of airlines

f INDIGO was consistently profitable till FY19 while in FY20 and FY21 its profitability was impacted due to pandemic

(80,000)

(60,000)

(40,000)

(20,000)

0

20,000

40,000

60,000

80,000

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

FY19

FY20

FY21

FY22

E

FY23

E

FY24

E

(Rs

mn)

Adj PAT Indigo Adj PAT SpiceJet

(100)

(50)

-

50

100

150

020406080

100120140160180

FY10

FY11

FY12

FY13

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FY19

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E

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E

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E

(%)

(mn)

Domestic Passengers International Passengers

Domestic YoY Growth (RHS) International YoY Growth (RHS)

(30)

(20)

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10

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60

FY01

FY02

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FY14

FY15

FY16

FY17

FY18

FY19

FY20

(%)

GDP Per Capita growth GDP growth Aviation Traffic growth

20 23 30 33 37 40 42 41 43 48 5316 1720 19 15 11 12 12 12

16 14

6 67 9 9

88 9 9

11 82 3 4 5

6 7

23 4 5

7 7

16 1618 18 18 15 13 12 11

11 10

42 3825 21 20 21 18 17 14

1 1

0

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40

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120

FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21

(%)

Indigo Spice jet Go First Vistara Air Asia Air India Others

0.0

0.5

1.0

1.5

2.0

010,00020,00030,00040,00050,00060,00070,00080,000


(Rs)

(Rs/

kl)

Brent Crude ATF Prices

Fuel CASK - Indigo (RHS) Fuel CASK - SpiceJet (RHS)

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1. Extremely Low Penetration of India’s Domestic Aviation – The Biggest Growth Driver

Over FY14-20, India’s domestic aviation sector clocked 15% CAGR, which was significantly faster than the most other consumer segments like FMCG, commercial vehicle/passenger vehicle/two-wheeler, railways/road freight and railway passenger segments. Over the next decade, we expect growth rate for India’s domestic aviation industry to be faster compared to last 5 years due to low base. Current penetration of air passenger traffic stands at just ~2% of total population, which is just 4% of rail traffic. Moreover, this penetration of air passenger traffic of 2% is much lower than several developed nations i.e. the US (55%), the UK (42%), China (9%) and Japan (21%) etc. We believe that such low penetration along with rising consumer aspiration owing to improved affordability is the single biggest trigger for the aviation industry over the next 10 years. We expect the domestic air passenger traffic to record 12-13% CAGR over FY20-FY30E. This would translate into 6.5% of penetration by FY30-end, which is still below most other developed countries (assuming 1% annual population growth). At present, we estimate that just <10% of India’s urban population uses air transport, which provides significant opportunity for growth.

In FY20, 141mn domestic air tickets were sold in India. Assuming every trip requires 2 tickets (including return), translates to 70.5mn trips. Assuming 2.5 trips per traveler, we arrive at 28.2mn people used air transport in FY20. This is just 2% of India’s population (1.4bn in 2020) and 6% of urban population (0.48bn in 2020)

While the recent pandemic-led slowdown has impacted air passenger traffic in FY21, we believe this is a temporary phenomenon/aberration and expect the passenger traffic to rebound with the recovery in GDP growth.

We observed direct co-relation between GDP and GDP per capita and air passenger traffic in all key global economies. Among the various growing economies, China is good example to compare in terms of comparable GDP per capita and population. China’s passenger traffic clocked 13% CAGR over last 2 decades (CY2000-CY2019), when base year GDP per capita (on PPP basis) was US$2,921 for China. Comparable GDP per capita for India was witnessed in 2006 when penetration was almost half than that of China. Even assuming penetration to remain 65% of China’s current penetration in next 10 years, it would lead to 12.5% CAGR in Indian air passenger traffic over FY20-FY30E.

Potential for Indian Aviation over the Next Decade: Over CY06-18, China’s domestic aviation clocked 12% CAGR (1.4x GDP growth rate). We believe that similar growth rate in aviation traffic in India is possible in the coming decade, which is albeit contingent upon strong GDP growth.

Key Sectoral Dynamics – At a GlanceI. Extremely Low Penetration of India’s Domestic Aviation – The Biggest Growth Driver

II. Higher GDP Growth & Rising GDP Per Capita to Result into Double-digit Growth

III. Improved Affordability & Comparable Fare with AC 3-Tier Railway Fare to Fuel Shift in Travel Preference

IV. Survival of Fittest is the Key Mantra; Balance Sheet Strength is Most Critical

V. India’s Aviation is Primarily an LCC Industry Now; Better PLF Leads to Improved Efficiency

VI. Better Productivity with Higher Seats per Aircraft & Improved Fuel Efficiency

VII. Thrust on Improving Regional Connectivity through UDAN Scheme

VIII. Concentrated Operation Reduces Cost & Improve Punctuality

IX. INDIGO & SJET Driving the Expansions in International Markets

10

Exhibit 7: China – Per Capita GDP vs. Air Traffic Penetration

Source: World Bank

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(%)($

)

China per capita (on PPP basis) Penetration (RHS)

2. Higher GDP Growth & Rising GDP Per Capita to Result into Double-digit GrowthAs evident in below graph, Indian air passenger traffic clocked 16% CAGR over FY04-FY19 as against 10% CAGR in GDP and 7% CAGR in GDP per capita growth over the same period. This translates into aviation growth as 1.6x of GDP growth. We observed that on most instances, air passenger traffic growth was 0.5x – 2x of GDP growth during the last 2 decades. Due to initial low base, the industry witnessed healthy growth during the initial years (17% CAGR over FY02-FY08). Therefore, it is more logical to consider growth parameters after the industry attained a sizable base. So, considering FY10 as more appropriate base, aviation traffic grew by 1.4x of GDP growth over FY10-FY20. Whilst the Government of India (GoI) targeted the country’s GDP to double to US$5trillion in 5 years, owing to unexpected pandemic impact, GDP target may get delayed by 1-2 years, which transforms into 9% GDP CAGR over FY20-FY27E. However, conservatively assuming 7.5% CAGR over FY20-FY27E, domestic air passenger traffic growth at 1.5x GDP growth translates into 12% CAGR over the same period.

Exhibit 6: China – Per Capita GDP vs. Aviation Traffic in mn PAX

Source: World Bank

3,21

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3,53

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3,93

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($)

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China per capita (on PPP basis) China Aviation Traffic (RHS)

11

Exhibit 8: Air Passenger Traffic vs. GDP Growth & Per Capita GDP Growth

Source: DGCA, RBI; GOI

Exhibit 9: Air Passenger Traffic over the Years

Source: DGCA

(30)

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60FY

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(%)

GDP Per Capita growth GDP growth Aviation Traffic growth

17.5

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24.8 31.8 43

.4 53.4

49.5 56

.9 67.0 75

.2

71.6 76

.4 87.4 10

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164.

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PAX

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Aviation Traffic

Exhibit 10: Affordability Index

Source: World Bank, RSec Research

3. Improved Affordability & Comparable Fare with AC 3-Tier Railway Fare to Fuel Shift in Travel Preference; Affordability Index Improved from 16x to 31x

The domestic aviation market share (as a proportion of rail and aviation in passenger kilometer terms) has risen sharply over the last five years to 13% in FY20. While flying is 5x faster, it is 4x-6x costlier than normal rail fare (just 60% costlier than AC Tier- III rail fare). Even so, the ratio of cost of air vs. rail travel has dropped from 14x in FY11 to 8.3x in FY20. Air fares in FY20 (we consider Jet Airway’s air fares as a proxy) dropped by ~11% since FY14.

While the air travel is still relatively more expensive than rail, affordability has doubled over the last six years, given that per capita GDP in rupee terms has risen from Rs79k in FY14 to Rs134k in FY20 (up 70%). As evident below, per capita GDP grew by 70% over FY14-FY20, while average air fare dropped by 11% over the same period, which transforms into 94% improvement in affordability over the same period. Our affordability index has risen from 16x to 31x during the same period.

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Affordability Index

12

Market share of India’s domestic aviation (FY20) in terms of passengers is 4%, while in terms of passenger kilometers (RPK) it is 13%, as the average distance for aviation in FY20 (962km) was 3.7 times than that of rail (262km).

Aviation is 8x Faster vs. Rail: Average speed of the fastest trains in India is 163.3kmph, while the average speed of flying in India (including taxiing time) was 528kmph in FY20, which makes aviation 3x faster than rail. However, if we compare it with average speed of regular rail (64kmph), aviation is 8x faster.

Aviation was 4x Costlier vs. Rail in FY20: Air fares in FY20 (we consider Jet Airways’ air fares as a proxy) dropped by ~11% since FY14, while rail fare increased by 51%. While air travel continues to be expensive, affordability has considerably improved over the last five years. While airfare declined by 11%, per capita GDP has risen from Rs79k to Rs134k (increase of 70%) in FY20.

Advantage over Railways: The railway has lagged airways in terms of traffic growth in the recent past, primarily due to a gradual shift in consumer preference towards airways especially in metros and Tier-I cities, mainly led by competitively priced airfares vs. rail fares owing to lower crude prices. Another reason for railways’ decline is a lack of capacity and constant waiting while booking tickets. Moreover, growth in Tier-II and Tier-III air travel on lower base is very high due to shift in travel mode and rising aspiration of consumers from the small cities.

Exhibit 11: Air Fare vs. Rail Fare

Air fare Rail fare

Route Duration (Hrs) Fare (Rs) Duration (Hrs) AC 2-Tier AC 3-Tier Rajdhani 2 Tier Rajdhani 3 Tier

Delhi-Mumbai 2.15 2,456 15.4 2,645 1,855 2,790 2,255

Delhi-Bengaluru 2.5 3,170 33.3 3,650 2,510 5,759 3,822

Bengaluru-Mumbai 1.35 2,120 23.55 2,050 1,425 - -

Delhi-Kolkata 2.2 3,012 17.3 3,770 2,640 4,153 2,778

Mumbai-Goa 1.2 2,019 9.3 2,470 1,520 - -

Ahmedabad-Mumbai 1.15 1,821 7.57 1,120 790 - -

Delhi-Hyderabad 2.1 3,015 25 2,645 1,840 4,650 3,121

Mumbai-Chennai 1.5 1,790 22.3 2,180 1,510 - -

Source: Make My Trip

As evident in below table overall rail passenger traffic clocked 0.3% negative CAGR over FY11-FY20, while domestic air passenger traffic increased by 11%. Within railway traffic, number of passengers travelling by III-tier AC stood at 113mn as against air passenger of 142mn in FY20. Over FY11-FY20, passengers travelling by III-tier AC grew by 113% and stood at 3% of overall rail passengers as of FY20-end. Its contribution increased from 1.5% to 3% in total rail passengers over the same period, which indicates shift in preference of travelers over the years with aspiration for more comfort and ease of travel.

Exhibit 12: Air Traffic vs. Rail Traffic & AC-III Tier

FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20

Domestic Air Traffic (Mn) 54 61 58 61 70 86 104 124 141 142

YoY Growth (%) 13.0 (4.8) 4.8 15.5 22.0 21.8 18.8 13.8 0.6

Railway Traffic (Mn) 3,590 3,847 3,944 3,845 3,719 3,648 3,549 4,784 3,655 3,489

YoY Growth (%) 7.2 2.5 (2.5) (3.3) (1.9) (2.7) 34.8 (23.6) (4.5)

AC-III Tier Traffic (Mn) 53 60 70 69 78 85 89 94 105 113

YoY Growth (%) 13.3 16.1 (2.1) 14.1 7.9 5.4 4.9 12.7 7.7

Source: DGCA, Indian Railways

Moreover, comparable air fare is just 1.6x of rail fare for III-tier AC based on fare per passenger.

We believe that majority of this II-tier and III-tier passengers would shift to air travel over next decade with increasing trend of comfortable travel in shortest possible time. While on the other hand, passengers from non-AC travel would gradually upgrade to AC coaches and creating over trafficking situation for AC travel segment. This would also encourage the travelers to opt for air travel.

13

4. Survival of Fittest is the Key Mantra; Balance Sheet Strength is Most Critical

Despite India’s domestic RPK witnessing a CAGR of 11% (FY11-20) to 137bn in FY20, two companies ceased their operations (Kingfisher in FY13 and Jet Airways in the beginning of FY20), while SpiceJet faced closure in Dec’14, but managed to turnaround its operations. Furthermore, Air India had accumulated loss of Rs673bn over FY11-20. Only IndiGo has been consistently profitable (except for pandemic years of FY20 and FY21) and increased its market share. While it is true that the price of fuel impacts the profits of the aviation sector, there is more to the sector than just the price of fuel. In FY13, INDIGO’s profitability increased despite a rise in price of Air Turbine Fuel (ATF). We believe this is due to Kingfisher’s exit from the market, which temporarily reduced the competitive intensity. This happened again for INDIGO in FY15, when SpiceJet was in distress.

Due to the ongoing pandemic-led disruption, the aviation industry is in major problem once again due to very low utilization. This industry has very high fixed cost structure, which significantly impacts the profitability during the downfall. Due to mounting losses, SJET has once again witnessed financial difficulty recently, while Air India is already under turbulence. On the other hand, INDIGO continues to remain financially robust with Rs171bn (Rs56.2bn as free cash) as a cash and cash equivalent as of 1QFY22-end.

Aviation being a very heavy capital-intensive industry, financial stability holds paramount importance. Therefore, survival of fittest is very essential during the ongoing tough situation. INDIGO being more prudent backed by a strong management appears to be the fittest among the Indian aviation players.

5. India’s Aviation is Primarily an LCC Industry Now; Better PLF Leads to Improved Efficiency

The LCCs have been gaining market share of domestic air travel over the years and it improved from 63% to 82% over FY06-FY20. Notably, PLF improved from 68% to 88% in domestic segment over the same period. There is a strong co-relation between market share gain by LCCs and improvements in PLF. Over the last 5 years, PLF of LCCs was 6.1% pts higher than for FSCs. As the duration of domestic flight is short (~2 hours on an average), we believe business class is largely an unnecessary luxury, which has lower PLF. Over the last 5-6 years, LCC gained decent market shares in domestic aviation industry, which reinforces our view on unnecessary luxury. Amongst the LCCs, INDIGO is the clear winner, as the company accounts for the major chunk of market share gain. During FY13-20 for domestic operations, passenger load factor (PLF) improved from 75% to 86%. Moreover, its overall aircraft utilisation (represented by active hrs/day) over FY14-FY19 improved by 17% to 12.4 hrs/day in FY19, though it dropped marginally to 11.7hrs/day in FY20, due to initial impact of COVID-19 towards the end of the fiscal. In our view, higher utilisation (PLF and active hours) augurs well in terms of the airlines’ profitability in the near-term. With 82% market share in terms of passenger kilometers in the Indian domestic aviation industry, the domestic aviation market is essentially an LCC market.

Exhibit 13: LCC & FSC Domestic Market share Trend over the Years

Source: DGCA

6372 78 81 83 82 78

66 66 67 66 69 69 7282 83

3728 22 19 17 18 22

34 34 33 34 31 31 2818 17

0

20

40

60

80

100

FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21

(%)

LCC FSC

14

Higher PLF Entails Higher Profitability with Higher Sensitivity to Margin: In general, as higher PLF leads to a proportionate increase in variable cost of most industry, the benefit of operating leverage on margin is limited. However, as fixed cost component is very high in case of aviation industry, it has different cost dynamics. Various cost components like fuel, salary, ownership and maintenance have a minimal linkage with the number of passengers. It is primarily because of the ratio of incremental passenger payload to total weight for air travel is low, implying low sensitivity of number of passengers to fuel consumption and ownership/maintenance cost is independent of PLF. We estimate just 1% higher PLF would increase Profit before tax/Available seat kilometers (PBT/ASK) by 6%/26% for INDIGO/SJET in FY24E.

6. Better Productivity with Higher Seats per Aircraft & Improved Fuel EfficiencyAn aircraft, which is active for 10% longer per day, can generate proportionately higher sales. This reduces ownership cost/ASK, providing a cost advantage and maximizes profitability. Lease rent has a fixed and a variable component based on usage. The fixed component is ~60-65% for Indian aviation companies. Thus, an airline can reduce ownership cost/ASK by higher sweating of asset. Longer distance flights and higher slots with priority at airports increase active hours to some extent.

Higher Seats in New Fuel-efficient Aircrafts Ensures Lower Fuel Usage/ASK for LCCs: Fuel cost/ASK is similar for both LCCs and FSCs, despite the cost of ATF for international airlines being ~20% lower than that of domestic airlines. The LCCs with only economy class have 20-25 more seats on the same aircraft (A320/B737-800 have 180-190 seats in economy class) than FSCs with 2 classes, reducing fuel cost/ASK by ~13%. Most fleet of Air India and Vistara have lower fuel efficiency vs. fleet of INDIGO and SJET.

Favourable Cost Benefit Ratio of New Aircraft: Airbus and Boeing have launched more fuel-efficient models (A320neo/ B737Max), which are ~12-15% more fuel-efficient compared to their predecessors (A320/B737) on a fuel/ASK basis. Though there is similar increase in prices of new aircraft, fuel cost forms sizable portion for the industry.

7. Thrust on Improving Regional Connectivity through UDAN Scheme The GoI launched Ude Deshka Aam Naagrik (UDAN) scheme with a view to improving regional connectivity and making the routes affordable by capping rates on short-haul flights for which viability gap funding (VGF) is provided to the airlines, by reducing taxes on ATF and lowering airport charges. As of Jun’21, 357 routes were allotted through four rounds of bidding. UDAN is a part of National Civil Aviation Policy (NCAP) and jointly funded by the GoI and the state governments. UDAN plans to operationalize ~100 regional airports with a target of 6.9mn RCS seats per annum and annual VGF requirement of Rs11.7bn. UDAN is expected to run for ~10 years with fare for one-hour journey of ~500km capped at ~Rs2,500 and with the shortfall met by the government in the form of VGF.

Salient Features of UDAN Scheme:

f The scheme duration is for 10 years

f Airlines participating in UDAN are selected through a competitive bidding process

f The central government will provide the following:

• Subsidy to cover VGF for participating airlines

• Concessional GST on tickets booked using the scheme

• Code sharing for flights under the policy

• Excise duty of 2% on ATF (vs. 14% on other routes) for 3 years.

Exhibit 14: LCC & FSC Domestic PLF Trend over the Years

Source: DGCA

68 69 6964

7277 75 75 73

7983 84 87 86 86

68

0

20

40

60

80

100

FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21

(%)

LCC FSC Industry

15

f The state governments will extend the following support:

• GST reduction to 1% for 10 years on ATF vs. 20-30% on other routes• Coordination with the oil marketing companies (OMCs) to facilitate re-fueling

facilities• Provide land for airport and ancillary development• Trained security personnel• Utilities at subsidized rates• VGF of 20%

f Airport operators such as the Airports Authority of India (AAI) will provide the following supports/concessions:

• No parking, landing and storage charges at participating airports• Nil TNLC (Terminal Navigation Landing Charges)• Allow ground handling by the airline selected through the bidding process

VGF is not provided to the cargo airlines, while all other terms and conditions remain the same as passenger airlines. The fares are graded based on distance and flight hours for both fixed-wing and rotary-wing services. The RCS subsidy is funded by a levy of Rs5,000/flight on major routes. Flights regulated under this policy framework can be booked from the UDAN website and major travel portals by the passengers.

VGF is for 3 years from the award of the route. Airlines have to submit the VGF required in their proposal. The airline quoting the lowest VGF are preferred. VGF is for 50% of the seats (RCS seats) and the airfare is capped on these seats. Airlines are free to charge any rate for the balance 50% seats. The airline which has been granted an RCS route will have exclusive rights on it for 3 years.

Exhibit 15: Udaan Routes

No. of Routes commenced

RCS-UDAN 1.0 56

RCS-UDAN 2.0 134

RCS-UDAN 3.0 139

RCS-UDAN 4.0 28

Source: Airports Authority of India (AAI)

8. Concentrated Operation Reduces Cost & Improve Punctuality

Each airline needs at least one check-in counter, one office and ground staff at every airport irrespective of its scale of operations. ATM/destination can be an indication of concentration of operations. High ATM/destination reduces overheads. The more profound impact of concentrated operations is the punctuality of take off and landing because an airline with high ATMs at an airport (a large client of the airport) may be given priority for take-off and landing. Punctuality of travel is a unique selling proposition (USP) for airlines. Generally, achieving a USP has some associated cost, however, creation of this USP helps the airline to reduce cost. On the other hand, flights that take off on time but are delayed when landing incur high fuel cost. Further, delays lead to wastage of man-hours also. Delays during take-off reduces active hours, while delays during landing (but taking off on time) reduces speed but not active hours. Punctuality increases active hours, reducing ownership cost/ASK. Going forward, this parameter would bring cost efficiency for few players like INDIGO, which has maintained high level of punctuality over the years and gained market share due to this USP.

9. INDIGO & SJET Driving the Expansion in International Markets

INDIGO has significantly enhanced its focus on international expansion over the past few years. Its international passenger witnessed a robust 53% CAGR over FY17-FY20 to 7mn. INDIGO has earlier guided for 50% of additional capacity to be deployed on international routes. This implies >50% growth in its international ASKM over next 2 years. INDIGO used to cater to 24 international destinations at peak level in 4QFY20, while it is currently catering to only 10 destinations due to pandemic-led restrictions. We believe that with rapid vaccination globally and reducing restrictions on international travel for fully vaccinated passenger, it would bounce back to earlier peak level in terms of international destinations, passenger traffic and ASKM over next 1-2 years. The company does not have any wide body aircrafts, which restricts it to operate on long haul international routes. However, it has mentioned that wide body operations are inevitable eventually though not likely in the near-term.

16

INDIGO’s Partnership with Turkish Airlines to Expand International Routes: As a part of international expansion strategy, INDIGO has partnered with Turkish Airlines, which helped it to add over 20 (currently flies to 13 destinations) additional destinations across Europe. Apart from supporting its direct services to Istanbul, this strategic partnership will expand the choices available for the customers for journeys beyond Istanbul, using Turkish Airlines’ network. Through this codeshare agreement, the customers will get the simplicity of purchasing connecting flights and seamless travel to destinations beyond Istanbul.

Exhibit 16: International Destinations under code share with Turkish Airlines

Amsterdam Budapest Malta Tel Aviv London

Athens Copenhagen Paris Vienna

Brussels Dublin Prague Zurich

Source: goindigo.in

Exhibit 17: Strong International Traffic Growth on the Cards for Players in Expansion Mode

FY18 FY19 FY20 FY21

International Air Traffic (Mn) 23.9 26.0 24.3 5.3

YoY Growth (%) 9 (7) (78)

Source: DGCA

SpiceJet, Go First to Expand; Vistara & Air Asia to Ramp-up International Operations: Though SpiceJet currently flies to very few international destinations due to pandemic, it used to fly at a peak of 10 destination as of FY20-end and it would expand its operation further. Also, SpiceJet has entered into a code share agreement with Emirates in Apr’19, which would enable a wider connectivity to its passengers on the Emirates' network across the US, Europe, Africa and Middle East. Emirates has presence in 159 destinations across 86 countries globally. Go First, Vistara and Air Asia too are ramping up their expansions in international markets.

Recently American Airlines and INDIGO have entered into a one-way codeshare agreement, which allows the former to sell seats on the latter’s flights on 29 routes. The codeshare, which will require approval from the US and Indian governments, is expected to begin in Oct’21, as American Airlines plans to launch new service between New York (JFK) and Delhi on 31st of Oct’21 and between Seattle and Bengaluru on 4th of Jan’22.

17

Sensitivity Analysis (FY24)We examine the sensitivity of various factors with respect to changes in fuel prices and USD/INR rates. We find that with every US$1/bbl increase in crude price, fuel expense – as a percentage of sales – increases by ~50bps for both the companies, while EPS is inversely impacted by ~Rs5 and Rs1 for INDIGO and SJET, respectively. Also, with every Re1 change in USD/INR rate, EBITDA margin move inversely by ~60bps and ~70bps for INDIGO and SJET, respectively.

IndiGo

SpiceJet

Exhibit 18: Fuel Expense as a Percentage of Sales

USD

/IN

R

Crude ($/bbl)

65 66 67 68 69 70 71

69.5 28.9 29.4 29.8 30.3 30.7 31.2 31.6

70.5 29.4 29.8 30.3 30.7 31.2 31.6 32.1

71.5 29.8 30.2 30.7 31.1 31.6 32.1 32.5

72.5 30.2 30.7 31.1 31.6 32.0 32.5 33.0

73.5 30.6 31.1 31.5 32.0 32.5 33.0 33.4

74.5 31.0 31.5 32.0 32.5 32.9 33.4 33.9

75.5 31.4 31.9 32.4 32.9 33.4 33.9 34.3

Source: RSec Research

Exhibit 21: Fuel Expense as a Percentage of Sales

USD

/IN

R

Crude ($/bbl)

65 66 67 68 69 70 71

69.5 32.8 33.3 33.8 34.3 34.9 35.4 35.9

70.5 33.3 33.8 34.3 34.8 35.4 35.9 36.4

71.5 33.8 34.3 34.8 35.3 35.9 36.4 36.9

72.5 34.3 34.8 35.3 35.8 36.4 36.9 37.4

73.5 34.7 35.3 35.8 36.3 36.9 37.4 37.9

74.5 35.2 35.7 36.3 36.8 37.4 37.9 38.4

75.5 35.7 36.2 36.8 37.3 37.9 38.4 39


Exhibit 20: EBITDA Margin

USD

/IN

R

Crude ($/bbl)

65 66 67 68 69 70 71

69.5 30.7 30.3 29.8 29.4 28.9 28.5 28

70.5 30.1 29.7 29.2 28.8 28.3 27.9 27.4

71.5 29.5 29.1 28.6 28.2 27.7 27.2 26.8

72.5 28.9 28.5 28.0 27.5 27.1 26.6 26.2

73.5 28.3 27.9 27.4 26.9 26.5 26.0 25.5

74.5 27.8 27.3 26.8 26.3 25.8 25.4 24.9

75.5 27.2 26.7 26.2 25.7 25.2 24.7 24.3


Exhibit 23: EBITDA Margin

USD

/IN

R

Crude ($/bbl)

65 66 67 68 69 70 71

69.5 19.9 19.3 18.8 18.3 17.8 17.3 16.8

70.5 19.1 18.6 18.1 17.6 17.1 16.6 16

71.5 18.4 17.9 17.3 16.8 16.3 15.8 15.3

72.5 17.6 17.1 16.6 16.1 15.5 15 14.5

73.5 16.9 16.4 15.8 15.3 14.8 14.2 13.7

74.5 16.2 15.6 15.1 14.5 14 13.5 12.9

75.5 15.4 14.9 14.3 13.8 13.2 12.7 12.1


Exhibit 19: EPS

USD

/IN

R

Crude ($/bbl)

65 66 67 68 69 70 71

69.5 204.7 199.9 195.1 190.3 185.5 180.6 175.8

70.5 196.9 192.0 187.2 182.3 177.4 172.5 167.6

71.5 189.1 184.2 179.2 174.3 169.3 164.4 159.4

72.5 181.3 176.3 171.3 166.3 161.2 156.2 151.9

73.5 173.5 168.4 163.4 158.3 153.2 148.1 143.0

74.5 165.7 160.6 155.4 150.3 145.1 139.9 134.8

75.5 157.9 152.7 147.5 142.3 137.0 131.8 126.6


Exhibit 22: EPS

USD

/IN

R

Crude ($/bbl)

65 66 67 68 69 70 71

69.5 15.7 14.6 13.6 12.6 11.6 10.6 9.6

70.5 13.8 12.8 11.8 10.8 9.8 8.7 7.7

71.5 12.0 11.0 9.9 8.9 7.9 6.9 5.8

72.5 10.2 9.1 8.1 7.1 6.0 5.0 3.9

73.5 8.4 7.3 6.2 5.2 4.1 3.1 2.0

74.5 6.5 5.5 4.4 3.3 2.2 1.2 0.1

75.5 4.7 3.6 2.5 1.5 0.4 (0.7) (1.8)


18

COMPANY SECTION

19

Share price (%) 1 mth 3 mth 12 mth

Absolute performance 4.2 15.0 55.6

Relative to Nifty 1.5 3.2 2.1

Shareholding Pattern (%) Jun-21 Mar-21

Promoter 74.8 74.8

Public 25.2 25.2

Scenario Analysis Bear

Case

Base

Case

Bull

Case

Console Rev CAGR FY21-FY24 (%)

51.0 56.0 61.0

FY24E EBITDAR Margin (%)

25.2 28.5 31.1

FY24E EBITDAR (Rs.mn)

1,26,989 1,57,990 1,89,904

Target EV/EBITDAR multiple (x)

6.5 7.5 8.5

TP (Rs.) 1,855 2,750 3,805

1 Year Stock Price Performance

Note: * CMP as on 1 October 2021

Market Leader in Domestic Aviation Space

f InterGlobe Aviation (INDIGO) is the undisputed leader with 53% market share in terms of passenger km (as on FY21), which we believe would further help it on margin and profitability front. We believe that INDIGO would outpace the industry growth on the back of market share gain and higher growth in international segment.

f INDIGO’s cost structure is the lowest due to higher Air Traffic Movement (ATM)/destination and concentrated operations, while lucrative time slots at airports improve passenger load factor (PLF). It enjoys better bargaining power for prime slots with the airports vs. peers due to its concentrated operations.

f Despite being the lowest-cost operator, INDIGO is highly profitable vs. peers, while decent cash generation and better returns supported its balance sheet over the years. Asset light model with operating lease model resulted in healthy cash and cash equivalent on balance sheet, which we believe would aid INDIGO to sail through the tough times.

f INDIGO operates 10 international destinations now (due to pandemic) compared to 24 in FY20 (out of which, 20 were serviced by Jet Airways earlier). Thus, it enhanced its market share via slots vacated by Jet Airways. We believe sizeable international operations is one of the biggest growth drivers over next decade due to limited competition.

ESG Analysis: Analyzing INDIGO on 20 key criteria (10 points each) under ESG Matrix, we have assigned an overall score of 68% to the company. Under “Environmental Head”, we have assigned 54% score, as they emit radiation and consume conventional fuel. Under “Social Head”, we have assigned 73% score considering its data policy and employee and labour engagement, while under “Governance Head”, we have assigned 77% score, based on its overall governance structure (please refer to page no 24 for detailed ESG analysis).

Outlook & ValuationWe expect strong revival in air passenger traffic over next 2 years and we factor in 45% CAGR in ASK over FY21-FY24E (vs. 23% CAGR over FY18-20) and an improvement in EBITDAR margin by 2,670bps over FY21-FY24E. We believe that INDIGO’s strong cash position would help in sustaining its market share gain along with pricing power, going forward, which would drive its overall profitability. It is best play to capitalize on the fastest-growing Indian aviation sector. We initiate coverage on INDIGO with BUY and 2-Year Target Price of Rs2,750, valuing the stock at 7.5x of FY24E EV/EBITDAR.

InterGlobe Aviation Aviation | India

Institutional Equity Research

Initiating Coverage | 4 October 2021

BUY2 Year Target Price: Rs2,750

CMP* (Rs) 1,975

Upside/ (Downside) (%) 39

Bloomberg Ticker INDIGO IN

Market Cap. (Rs bn) 760

Free Float (%) 25

Shares O/S (mn) 384

Key Triggers:

Dominant player in a fast-growing sector with strong entry barriers

Best-placed among peers to tide over the current COVID-led disruptions on the back of balance sheet strength

Low-cost structure expected to support profitability and market share gain

Attractive valuation





Key FinancialY/E Mar (Rs mn) FY19 FY20 FY21 FY22E FY23E FY24E

Net Sales 2,84,968 3,57,560 1,46,406 2,11,272 4,10,977 5,54,920

EBITDAR 36,556 45,348 2,550 (2,824) 89,630 1,57,990

EBITDAR Margin (%) 12.8 12.7 1.7 (1.3) 21.8 28.5

PAT 1,561 (2,482) (58,298) (63,335) 21,009 63,978

EPS (Rs) 4.3 (6.5) (151.6) (164.6) 54.6 166.3

P/E (x) 459.4 (305.9) (13.0) (12.0) 36.2 11.9

EV / EBITDAR (x) 17.9 19.3 370.9 (351.8) 11.5 6.1


250

750

1,250

1,750

2,250

2,750

Oct

-20

Oct

-20

Nov

-20

Dec

-20

Dec

-20

Jan-

21

Feb-

21

Mar

-21

Mar

-21

Apr

-21

May

-21

May

-21

Jun-

21

Jul-2

1

Jul-2

1

Aug

-21

Sep-

21

Sep-

21

20

Our Thesis

Key Risks

Key Sectoral Theme

Key Investment Theme

f Undisputed Market Leadership in a Fast-growing Sector: INDIGO is the industry leader with a 53% market share in terms of passenger km (as of FY21). In this industry, early-movers get an advantage in terms of lucrative time slots at airports. The industry has scale benefits, with lower overheads and higher asset turns. We believe undisputed market leadership would further help INDIGO on margin and profitability front, going forward.

f Low-cost Structure – The Key Factor for Profitability & Market Share Gain: In FY20, INDIGO had the lowest cost/ASK amongst all Indian players. In this industry, it is difficult to alter the cost structure. However, INDIGO’s cost structure is the lowest compared to all due to higher ATM/destination (lower overheads) and concentrated operations (higher active time), which reduce ownership cost/ASK, while lucrative time slots at airports vs. the incumbents improves PLF.

f Sharp increase in ATF prices

f Weak demand growth

f Adverse currency movement

f Prolonged feud between the promoters

INDIGO (Rs146bn - FY21)

Key Product Segment Passenger Ancillary (Cargo) Ancillary (Non-Cargo) Others

Revenue (Rs mn: FY21) 129,619 11,451 1,028 4,307

Revenue Mix (%) 89 8 1 3

CAGR (FY16-FY20) (%) 22 8 29 41

CAGR (FY21-FY24E) (%) 61 34 34 15

f India’s Domestic Aviation is amongst the Fastest Growing Industry: Domestic aviation, which grew at a faster pace than most other segments of the economy over FY14-FY20 (15% CAGR in domestic aviation volumes), is expected to witness consistent growth over the next 5 years. As per back-of-the-envelope calculation, low penetration (just ~2% of population and ~6% of urban population) provides huge potential for growth over next decade. Using the growth of China’s aviation market as a rough indicator of the direction of the Indian industry, we extrapolate that aviation industry has reached inflexion point and would continue witnessing double-digit growth, which would benefit its key players.

21

EBITDAR & Target Price


1-Yr Forward EV/EBITDAR


65,667

36,556 45,348 2,550 (2,824)

89,630

1,57,990 1,618

659 589

1,256

2,750

(1,000)

(500)

-

500

1,000

1,500

2,000

2,500

3,000

(20,000)

-

20,000

40,000

60,000

80,000

1,00,000

1,20,000

1,40,000

1,60,000

1,80,000

FY18 (-3) FY19 (-2) FY20 (-1) FY21 (BaseYear)

FY22E(Year 1)

FY23E(Year 2)

FY24E(Year 3)

(Rs)

(Rs)

EBITDAR Target Price

Price Sensitivity Analysis

EBITDAR (Rs) Growth (%) EV/EBITDAR Target EV/EBITDAR Multiple (x)

6.0 7.5 9.0 10.5

FY18 (-3) 65,667 10.2 1,362 1,618 1,874 2,131

FY19 (-2) 36,556 (44) 17.9 517 659 802 944

FY20 (-1) 45,348 24 19.3 412 589 766 943

FY21 (Base Year) 2,550 (94) 370.9 NA NA NA NA

FY22E (Year 1) (2,824) NA (351.8) NA NA NA NA

FY23E (Year 2) 89,630 NA 11.5 907 1,256 1,605 1,955

FY24E (Year 3) 1,57,990 (5,694) 6.1 2,135 2,750 3,366 3,982

Source: Company, RSec Research; NA: Not Applicable

(2,00,000)

-

2,00,000

4,00,000

6,00,000

8,00,000

10,00,000

12,00,000

14,00,000

Mar

-16

Jul-1

6

Nov-1

6

Mar

-17

Jul-1

7

Nov-1

7

Mar

-18

Jul-1

8

Nov-1

8

Mar

-19

Jul-1

9

Nov-1

9

Mar

-20

Jul-2

0

Nov-2

0

Mar

-21

Jul-2

1

EV 4.5 6 7.5 10 11.5

22

Scenario AnalysisRevenue & Margin Sensitivity on Standalone Earnings

Bear Case Base Case Bull CaseConsole Rev CAGR FY21-FY24 (%) 51.0 56.0 61.0

FY24E EBITDAR Margin (%) 25.2 28.5 31.1

FY24E EBITDAR (Rs mn) 1,26,989 1,57,990 1,89,904 Source: RSec Research

Bear Case Scenario: In Bear Case scenario, we expect INDIGO’s revenue to clock 51.0% CAGR over FY21-FY24E (assuming lower growth in international business and marginal market share fall in domestic business), while FY24E EBITDAR margin is pegged at 25.2%. Assigning 6.5x EV/EBITDAR multiple to its FY24E EBITDAR, we arrive at a Target Price of Rs1,855.

Base Case Scenario: In Base Case scenario, we expect INDIGO’s revenue to clock 56.0% CAGR over FY21-FY24E (assuming higher growth in international business), while FY24E EBITDAR margin is pegged at 28.5%. Assigning 7.5x EV/EBITDAR multiple to its FY24E EBITDAR, we arrive at a Target Price of Rs2,750.

Bull Case Scenario: In Bull Case scenario, we expect INDIGO’s revenue to clock 61.0% CAGR over FY21-FY24E (assuming higher growth in international business and market share gain in domestic business), while FY24E EBITDAR margin is pegged at 31.1%. Assigning 8.5x EV/EBITDAR multiple to its FY24E EBITDAR, we arrive at a Target Price of Rs3,805.

Price Target Across ScenarioFY24E EBITDAR Down-cycle Target Up-cycle

(Rs mn) Multiple Multiple Multiple1 Yr-Fwd EV/EBITDAR 6.5 7.5 8.5

Bear Case (Rs) 1,26,989 1,855 2,186 2,516

Base Case (Rs) 1,57,990 2,340 2,750 3,161

Bull Case (Rs) 1,89,904 2,817 3,311 3,805 Source: RSec Research

23

Key Criteria Score Risk Comments

Management Quality 7 LowThe management is capable of managing tough situations like pandemic, as the quality of its service is maintained despite challenging business environment; it also has a decent track record on guidance front; both the promoters have vast experience of working with global aviation industry for many years, which has helped INDIGO to become undisputed market leader in India

Promoter's Holding Pledge 9 Low Overall promoters’ holding stood at 75% as of Jun’21, while no share is pledged by any promoter

Board of Directors Profile 8 LowA perfect blend of experience, expertise and professionalism offers great comfort; few of them have a vast industry experience; INDIGO’s total board strength is 10, which consists of 5 non-executive directors, 4 independent directors and 1 executive director

Industry Growth 8 LowDomestic aviation industry is expected to witness high double-digit growth over FY21-FY24E (at 44% CAGR) on a low base; very low penetration in India would support high growth in next decade

Regulatory Environment / Risk 3 HighAviation industry is highly regulated by DGCA; further, as most airlines have a global footprint, they are vulnerable to external global factors such as political tension and economic conjuncture; it also has several restrictions from various government authorities domestically as well as internationally

Entry Barriers / Competition 7 LowAviation industry has a very high entry barriers being highly capital-intensive industry and various regulations for getting approvals/licenses; however, the industry has always exhibited higher level of competitive intensity despite very few players are actively operational; INDIGO has been gaining market share consistently overcoming the competition continuously

New Business/Client Potential 7 LowThe company has been consistently adding new aircrafts, new routes in Tier-II/III cities; during the last 3-4 years, it has increased focus on international routes in last 3-4 years to expand business and profitability; the company has potential to expand global footprint through tie-ups and code sharing agreements

Business Diversification 6 LowThe company has stable and diversified revenue streams i.e. primary (passenger air travel) and ancillary (seat plus, 6E services, charter service, group bookings, cab, cargo and merchandise etc.); however, as everything is related to aviation industry, it has limited diversification

Market Share Potential 9 LowINDIGO has gained >3,000bps market share in last decade; currently, its undisputed leadership with the highest market share of 53% (based on RPK), which would further increase, going forward

Margin Expansion Potential 7 Low EBITDAR margin is expected to decline by 310bps in FY22E, while it would improve by 2,310bps and 670bps in FY23E and FY24E, respectively

Earnings Growth 8 LowWe have projected INDIGO to turnaround in FY23 in Financials (P&L) from current losses amid ongoing pandemic; we expect it to record PAT of Rs63.9bn in FY24E as against Rs58.3bn net loss in FY21

Balance Sheet Strength 3 HighBalance sheet is under stress due to mounting loss in FY20 and FY21 due to pandemic-led disruptions; currently, the company has decent liquidity of Rs56bn, while it needs more money through equity infusion, as its net-worth turned negative for the first time in 1QFY22

Debt Profile 2 HighIts balance sheet is very much stretched at this juncture and its D/E ratio increased from an average of 0.4x over FY17-FY19 to 421x as of FY21-end due to pandemic; its net-worth turned negative in 1QFY22

FCF Generation/NWC 3 High Constant losses and mounting debt level to continue impacting cash flow, which is expected to remain negative till FY23E

Dividend Policy 1 High The company has not given any dividend for last 5 years despite recording decent profit

Total Score Out of 150 88

Average Score (%) 59% Low


24


Environmental

Climate Change & Carbon Emission 4 HighAir travel accounts for ~2% of global carbon emissions; INDIGO is committed to use energy-efficient equipment to reduce carbon footprint and has set ambitious targets to lower CO2 emission; it has witnessed a steady drop in carbon footprint since FY17; it aims to reduce CO2 emission by 18%/ASK in FY23 compared to FY16; it saved 223,698 tonne CO2 emission in FY21 (calculated on block fuel consumption)

Air & Water Pollution 3 High

Though by nature of the business, INDIGO’s operation leads to high air and water pollution, it has undertaken adequate measures to reduce GHG emission by using fleet renewal, investment in cleaner vehicles and equipment, timely maintenance of engine and airframe, flight planning and training to operational staff; by investing in fuel-efficient fleet, emission-free battery-operated ancillary equipment, INDIGO is improving its financial performance as well as fulfilling its environmental responsibility

Biodiversity 6 Low In its endeavour towards protecting biodiversity, INDIGO has planted native Aravalli trees in Greater Noida under its initiative ‘Bundh’

Deforestation 2 HighIn order to boost the connectivity to remote areas of the country and making air travel affordable to everyone, a lot of new airports are being built, which involve massive deforestation

Energy Efficiency 7 LowINDIGO’s fleet includes A320 NEO aircraft, which are up to 15% more fuel-efficient vs. the current A320 (without sharklet aircraft); in the last one year, 100 in-service A320 NEO aircrafts operated 185,460 flights, thereby reducing carbon emission by 298 kilo tonne; in FY20, INDIGO operated 25 ATR 72-600 turboprop aircrafts (which are more fuel-efficient than jet aircraft) to operate on regional routes; it further plans to convert balance 100 CEO aircrafts to NEO aircrafts by Dec’22

Waste Management 6 LowINDIGO is recycling all used uniforms, shoes, bags, aircraft carpets and seat covers; all used/old articles from across its network are being recycled hygienically and upscaled by their partner organizations into bags, pouches, folders and other items and sold in local market; sale proceeds form an income generating opportunity for the women residing in slums/villages

Defence / Arms / Ammunition Exposure 10 Low No exposure to arms and ammunition space

Social

Customer Satisfaction 9 LowThe company is rated high on customer satisfaction in terms of its service and OTP performance; it continues to be the most preferred aviation company for Indian passengers; the company has emerged as the leading domestic airline in terms of “on-time performance” (OTP) and has been ranked No. 1, with an average OTP of 95.4% in FY21

Data Protection & Privacy 8 Low The company maintains high level of data protection and privacy of customers’ data/details; it follows confidentiality policy

Gender & Diversity 8 Low Out of total 27,812 employees, ~11,472 are permanent women employees (~41%)

Employee Engagement 7 LowThe company conducts various employee-engagement programmes i.e. safety training, skill up-gradation, and cultural activities to ensure an employee-friendly environment

Community Relations / Service 6 LowIn FY20, it spent Rs227mn (out of prescribed amount of Rs315mn) towards CSR activities, which include rural development, education, relief and rehabilitation and environment etc.

Human Rights 7 Low It has proper human rights policy in place, which is applicable to all stakeholders and extended to all employees, associates and business partners

Labour Standard 6 LowThe company follows labour standards in terms of workplace, facilities and employee benefits; though it does not have a company-recognized employee association, it follows an open door policy under which the management can be approached by any employee to discuss any concern

Environmental, Social & Governance Matrix (ESGM)

25

Governance

Audit Committee Structure 5 MediumAs on March 31, 2021, INDIGO’s audit committee comprised of 3 Non-executive directors (2/3rd being Independent directors); the committee met 9 times in FY21 and all the directors were present in all meetings; all members of the committee have requisite expertise in financial management domain

Bribery & Corruption 8 LowINDIGO ’s operations are governed by various anti-bribery laws, it respects and endeavours to comply with all laws related to prevention of bribery and corruption; it has a zero-tolerance approach to bribery and corruption and does not (directly/indirectly) offer, pay, seek or accept payment, gift to improperly influence a business outcome; as a rule, only authorized and trained individuals are permitted to interact with the government officials/regulators

Executive Compensation 9 LowThe ratio of chairman’s remuneration to the median remuneration of employees stood at 5.4x in FY20, while the ratio of SpiceJet’s chairman’s remuneration to the median remuneration of employees stood at 750x during the same period

Lobbying 9 LowAs the company has excellent track record of the best on-time performance and good service delivery, it does not require any lobbying/similar tactics for business expansion; there is no cartel in the industry

Political Contribution 8 Low No political connection is observed

Whistleblower Scheme 8 LowThe company has established a vigil mechanism/whistleblower policy to enable all stakeholders (including suppliers and contractors) to report any unethical behaviour, actual/suspected fraud/violation of any code of conduct; the company affirms that no director/employee has ever been denied access to the audit committee


Total Score (%) 68% Low

Score For < 5 Red High Risk For 5 Blue Medium Risk For > 5 Green Low Risk

Total Score (%) For < 50 Red High Risk For 50 Blue Medium Risk For > 50 Green Low Risk

26

Key Highlights of Management Discussion f In Sep’21, the DGCA allowed the airlines to deploy 85% of their capacity up from 72.5%

and halved the fare cap period to 15 days from the date of ticket booking. The higher flight capacity limit will help INDIGO to introduce more flights, as the demand for domestic travel rises ahead of the upcoming festive season (Durga Puja and Diwali). The company is in favour of a full relaxation (i.e. to be allowed to operate at 100% of pre-COVID schedule) due to sharp increase in demand.

f Several aircrafts are grounded due to non-payment of dues to the aircraft lessors. Allowance to deploy full capacity would mean the stronger carriers such as INDIGO would garner higher market share.

f The management stated that the company’s current PLF is ~70%, while the yield is expected to go up in the upcoming months.

f The company will start flights connecting Kanpur with Delhi, Hyderabad, Bengaluru and Mumbai from 31st of October onwards adding Kanpur as the 71st domestic destination to its network.

f American Airlines and INDIGO have entered into a one-way codeshare agreement, which allows the former to sell seats on the latter’s flights on 29 routes. The codeshare, which will require approval from the US and Indian governments, is expected to begin in Oct’21, as American Airlines launches new service between New York (JFK) and Delhi on 31st of Oct’21 and between Seattle and Bengaluru on 4th of Jan’22.

Highlights of 1QFY22 Result Concall

f Major loss in 1QFY22 is attributable to forex loss to the tune of ~Rs2.9bn and lower interest income of ~Rs1.5bn. Fuel cost for the quarter was up by by ~Rs5.4bn (~2x YoY). Monthly revenue stood at Rs15.4bn, Rs6.7bn and Rs9.6bn in Apr’21, May’21 and Jun’21, respectively. Notably, Jul’21 revenue was close to Apr’21 level. CASK increased by 43.7% in 1QFY22 due to higher fuel price, INR depreciation and 41.5% lower capacity deployment. Its capacity stood at 44% of pre-COVID level in 1QFY22 due to second COVID wave vs. 75% in 4QFY21. RASK reduced by 16.4% due to reduction in PLF (down 11.4pts) and lower yield (down 5.7% QoQ). Cargo revenue remained almost similar to 4QFY21 level in 1QFY22.

f The company has obtained shareholders’ approval to raise Rs50bn through QIP. In Mar’21, INDIGO announced liquidity infusion of Rs45bn, and the company was able to secure additional liquidity of Rs10bn in 1QFY22. Out of the total, infusion to the tune of Rs40bn took place in 1QFY22.

f The management stated that the current capacity deployment stood at 65% (the government increased the capacity deployment to 85% in september) and the company is in talks with the Civil Aviation Ministry to relax certain restrictions. It expects close to 100% of pre-COVID domestic capacity by the end of the current fiscal. The corporate/business travel, which recovered by 50% in Feb-Mar’21, reduced in subsequent months again. The corporate/business travel normally accounts for 25% of the revenue, which shrunk to 7-8% due to second COVID wave and the management expects it to be 13-14% after the situation stabilizes. Metro-Non-metro travels rose to 65% from 45%, while Metro-Metro reduced in 1QFY22. The company is witnessing recovery in Metro-Metro travels.

f Cash burn increased to Rs334mn/day in 1QFY22 from Rs190mn/day in 4QFY21, due to lower demand and lower capacity deployment. FCF for the quarter stood at Rs56.2bn compared to Rs71bn in 4QFY21. Total cash flow for the quarter stood at Rs170.7bn. Operating lease liability for the quarter stood at Rs59.3bn. Total debt stood at Rs316.9bn as of 1QFY22-end.

27

Key Charts

Exhibit 1: Passenger & ASK Growth Trends over the Years

Source: Company; RSec Research

Exhibit 2: Market Share & PLF Trend over the Years

Source: DGCA

Exhibit 3: Revenue, EBITDAR & EBITDAR Margin over the Years


Exhibit 4: Fuel Cost/ASK & PBT/ASK


f With ~53% market share, INDIGO is poised to witness growth in line with the Indian aviation sector. Currently, India’s per capita seat is 0.08 compared to 2.6 in the USA or 1.03 in Malaysia. India is the world’s ninth-largest civil aviation market and ranked fourth in the world in domestic-passenger volume.

f Market leader in one of the most under-penetrated market. Its market share further increased to 55% in YTD FY22 from 53% in FY21.

f Perfect execution reflected in consistent performance. It is expected to witness turnaround in FY23E with positive EBITDAR in FY23E and FY24E.

f PBT/ASK is expected to turn positive in FY23E and FY24E with higher PLF and improving yield.

-

20,000

40,000

60,000

80,000

1,00,000

1,20,000

1,40,000

1,60,000

0

20

40

60

80

100

120

FY16 FY17 FY18 FY19 FY20 FY21 FY22E FY23E FY24E

(mn)

(mn)

No. of Passengers carried ASK (RHS)

84 85 88 87 87

696040 42 41 43

4853 55

0

10

20

30

40

50

60

0

10

20

30

40

50

60

70

80

90

100

FY16 FY17 FY18 FY19 FY20 FY21 YTD22

(%)(%

)

PLF - LHS Market share (RHS)

-5

0

5

10

15

20

25

30

35

40

(1,00,000)

-

1,00,000

2,00,000

3,00,000

4,00,000

5,00,000

6,00,000

FY16 FY17 FY18 FY19 FY20 FY21 FY22E FY23E FY24E(%

)

(Rs m

n)

Revenue (Rs Mn) EBITDAR (Rs Mn) EBITDAR Margin (RHS)

(1.5)

(1.0)

(0.5)

-

0.5

1.0

1.5

2.0


(Rs)

Fuel cost/ASK PBT/ASK

28

Key Investment Rationale

Our investment thesis is based on the following premises: I. Dominant Player in a Fast-growing Industry with Significant Entry Barriers

II. Low-cost Structure to Aid Profitability & Market Share Gain

III. Sharp Cost Control to Mitigate Volatile Fuel Price & Unfavourable Currency

IV. Strong Long-term International Flying Story

V. Tactical Shift to Focus on Regional Connectivity Opportunities

VI. Healthy Financials, Strong Balance-sheet & Robust Business Stability

I. Dominant Player in a Fast-growing Industry with Significant Entry Barriers

Over FY14-20, India's domestic aviation’s revenue passenger kilometer (RPK) grew significantly faster (at 15% CAGR) than the average growth of all other segments i.e. automobile, railways, FMCG and road freight etc. INDIGO is the industry leader with 53% market share (as of FY21-end) in India’s domestic aviation industry in terms of passenger kilometers. In aviation industry, the early movers get an advantage in terms of having the lucrative time-slots at airports. We believe new slots are likely to be less lucrative than the time slots already available with the incumbents. Further, the industry has scale benefits with large-scale leading to lower overheads and higher asset turns, which is imperative in a commoditized industry. INDIGO being a leader in this industry would capitalize on the fastest growing domestic aviation traffic. Moreover, being capital-intensive, the industry has strong entry barriers for the new entrants, which increases the visibility of further rise in INDIGO’s market share.

Exhibit 5: Market Share Trend (based on RPK) over 10 Years

Source: DGCA

II. Low-cost Structure to Aid Profitability & Market Share Gain

During FY20, INDIGO had the lowest cost/ASK amongst all players regardless of FSCs or LCCs. All India-based FSCs namely: Air India (unlisted), Jet Airways and Vistara (unlisted) incurred losses in FY20. Due to mounting losses, Jet Airways ceased operations in Apr’19. Thus, for right analysis, we are excluding FY20 and FY21, as the impact of the pandemic was more pronounced on aviation industry in these years. Therefore, we are analyzing all major parameters up to FY19. Amongst the LCCs, Air Asia-India (unlisted) and SpiceJet (SJET) were a loss-making (as of FY19). Only two airlines, namely INDIGO and Go First (unlisted), were profitable in FY19 (52% combined market share in the domestic segment in FY19 in terms of passenger kilometers). We believe lower cost should continue to support INDIGO’s ability to grow faster than the industry. We believe that in the aviation industry it is difficult for a player to significantly alter its cost structure in the short-term. Following are key parameters:

• Minimise Overheads/ASK: High Air Traffic Movement (ATM)/destination reduces overheads. INDIGO’S dominant market share is an advantage.

• Minimise Ownership Cost/ASK: Concentrated operations increase active time due to quick turn-around of aircrafts and punctual operations. INDIGO has better bargaining power for prime slots with the airports vs. peers due to its concentrated operations. More active hours reduce ownership cost/ASK, as the bulk of ownership cost is fixed.

• More Seats: 13% more seats on LCCs vs. FSCs on same aircraft model.

• Maximize Revenue: Lucrative time slots at airports always attract more passengers and pricing premium for those slots resulting into higher passenger load factor (PLF) at better profitability.

20 23 30 33 37 40 42 41 43 48 5316 1720 19 15 11 12 12 12

16 14

6 67 9 9

88 9 9

11 82 3 4 5

6 7

23 4 5

7 7

16 1618 18 18 15 13 12 11

11 10

42 3825 21 20 21 18 17 14

1 1

0

20

40

60

80

100

120


(%)


29

Exhibit 6: INDIGO - Air Passenger Traffic

33.044.0

52.065.0

75.0

30.740.8

77.3

101.8

0

20

40

60

80

100

120


(mn)

No. of Passengers carried

Source: DGCA, RSec Research

Exhibit 7: INDIGO - Available Seat Km (ASK)

42,826 54,582

63,510

81,028 96,249

45,425 60,683

1,08,517

1,37,880

-

20,000

40,000

60,000

80,000

1,00,000

1,20,000

1,40,000

1,60,000


(mn)

ASK

Source: DGCA, RSec Research

Exhibit 8: INDIGO’s Market Share & PLF Trend

Source: DGCA

Significant Market Share Gains in Testing Times: INDIGO leads the domestic aviation industry with ~55% market share in terms of passenger carried. Following the Jet Airways’ closure, its market share jumped in FY20 (from 43% to 48% over FY19-FY20). Further, the pandemic has also helped the company gaining further ground due to the vulnerability of other players in the segment and its own strong balance sheet and capabilities. In the past 20 quarters, INDIGO has witnessed significant domestic market share gain in terms of passenger carried (to 55% in FY21 from 38% in Jun’16). With further penetration along regional routes, we expect the company (8% CAGR over FY20-FY24E) to outperform the industry by 5% in terms of passenger traffic growth.

84 85 88 87 87

696040 42 41 43

4853 55

0

10

20

30

40

50

60

0

20

40

60

80

100


(%)(%

)

PLF Market share (RHS)

30

Exhibit 9: INDIGO's Market Share Trend (in terms of passengers carried) over Last 21 Quarters

Source: DGCA

Fleet Addition to Resume in FY24 to Cater Growing Demand: Despite temporary slowdown led by COVID-19, the company is expected to steadily increase its fleet over the long-term in line with demand growth. INDIGO earlier planned to have a fleet of 379 aircrafts by FY23-end from 262 aircraft as of FY20-end. However, due to pandemic it curtailed its expansion plan over FY21-FY23E. Despite reduction in number of aircrafts, its ASKM would not change much due to addition of NEOs, which have higher number of seats per aircraft. We expect it to bounce back strongly in FY24E and would resume its steady fleet addition over the next 5 years. All these initiatives will lead to 9.4% CAGR in ASK (from ~96,249mn to ~137,880mn over FY20-FY24E).

Exhibit 10: Fleet Size


III. Sharp Cost Control to Mitigate Volatile Fuel Price & Unfavourable Currency

INDIGO has the lowest cost structure compared with its peers and strives to maintain this edge, going forward as well. Few parameters, which have been helping INDIGO on cost front are: (a) single aircraft for narrow body operations and class configuration; (b) new fleet with fuel efficient engines (13-15% more efficient); (c) no-frill product offering; (d) young fleet; and (e) low distribution cost vs. others.

Exhibit 11: Efficient Cost Structure - A Key AdvantageIndiGo SpiceJet

(Rs/ASK) FY20 FY21 FY20 FY21Aircraft and engine rentals 0.1 0.1 0.1 0.2

Employee expenses 0.5 0.7 0.5 0.6

Aircraft maintenance 0.6 0.9 0.7 1

Airport fees/ charges 0.3 0.4 0.5 0.9

Other expenses 0.4 0.5 0.3 0.4

Fuel expenses 1.3 0.8 1.5 1.3

Interest 0.2 0.5 0.2 0.5

Depreciation 0.4 1 0.6 1.3

CASK 3.3 3.2 3.8 4.3

CASK ex-fuel 2 2.4 2.3 2.9Source: Company

38 40 42 40 41 38 39 40 41 42 43 4449 48 48 48

5359

55 54 52

0

10

20

30

40

50

60

70

1QFY

17

2QFY

17

3QFY

17

4QFY

17

1QFY

18

2QFY

18

3QFY

18

4QFY

18

1QFY

19

2QFY

19

3QFY

19

4QFY

19

1QFY

20

2QFY

20

3QFY

20

4QFY

20

1QFY

21

2QFY

21

3QFY

21

4QFY

21

1QFY

22

(%)

Market share

107131

159

217

262285

266 277300

0

50

100

150

200

250

300

350


(Uni

t)

Fleet size

31

Fleet Homogeneity for Narrow Body Operations and Single Class Configuration: INDIGO currently (as of 1QFY22) operates a fleet of 277 aircraft, comprising of 248 narrow body aircrafts of Airbus A320 family (includes 41 A321NEOs), which are used for its narrow body operations and 29 ATR aircrafts for its turboprop operations on smaller/regional routes. This largely homogenous fleet configuration gives INDIGO higher bargaining power with Airbus and lowers initial purchase cost. INDIGO also reduces recurring operating cost through lower maintenance, spare parts, operations, crew training and labour cost. For its A320/A321 NEO aircrafts INDIGO has entered into ‘power by the hour’ maintenance contracts wherein it pays a contracted rate per hour of aircraft flown towards its maintenance contracts in return for guaranteed availability of spares and replacements whenever required. This lowers the maintenance cost and ensures higher aircraft availability. Furthermore, INDIGO operates with a single-class configuration (all economy) giving it maximum seating capacity of 180 seats/aircraft (234 for A321NEO), which helps it to maximize PLF and improve yield/aircraft.

Exhibit 12: Fleet Details Type No. Seats

FY20 FY21 FY21

A320 CEO 123 100 180

A320 Neo 100 120 189

A321 Neo 14 39 234

ATR 25 26 78

Total Fleet 262 285

Source: Company

No-frill Product Offering: INDIGO neither offers a frequent flyer programme nor includes cost of food/beverages in the ticket price for its non-corporate passengers. This helps reduce operating cost and ticket prices.

Twin Strategy of Ownership/Lease Model to Reduce Cost: In the past, INDIGO’s simple plan of ordering aircraft in bulk enabled it to command substantial bargaining power. It secured huge discounts from the manufacturer and had deliveries spread out over a specified period. Simultaneously, a sale and leaseback option also reduced its overall cost of ownership. Under this strategy, the company ordered 731 new aircrafts from Airbus on operational lease with deliveries scheduled over 2011-2026, out of which, it has received 164 planes (by Jun’21 and 567 is pending). It has also ordered 58 ATRs, out of which it already received deliveries of 29. Deliveries have been smooth so far barring some technical issues with the engines, which got resolved in FY21-end.

INDIGO has made a strategic shift in its asset acquisition policy in last 2-3 years. It now also owns some aircrafts as against its traditional model of operational lease. It believes this would lower rental cost, as evidenced by the peers in the US and Europe, who have successfully adopted the twin strategy of owning and leasing.

IV. Strong Long-term International Flying StoryRapidly Expanding Domestic & International Presence: INDIGO has significantly stepped up its domestic and international expansion strategy over the last 2-3 years. It is looking to expand its international presence aggressively, given the strong set of opportunities post closure of Jet Airways. As a part of its strategy, the company deployed >50% of its incremental capacity on international routes in FY20. The airline covers 66 domestic destinations currently (as of 1QFY22-end) as against 37 domestic destinations in Mar’17. Addition of 29 domestic destinations over this period is a significant acceleration over its historical pace of expansion. Similarly, as of 4QFY20, it added 16 international destinations since Mar’18 (though its only 10 at present due to pandemic), compared to 8 international destinations as of Mar’18. In a very significant step towards becoming a serious international player, INDIGO has commenced regular flight operations to Turkey (Istanbul) and has entered into a code share agreement with Turkish Airlines, expanding its reach to over 20 (currently flies to 13 destinations) additional destinations in Europe. It has recently entered into a one-way codeshare agreement with American Airlines, which allows American Airlines to sell seats on INDIGO's flights on 29 routes. The codeshare, which will require approval from the US and Indian governments, is expected to begin in Oct’21, as American Airlines plans to launch new service between New York (JFK) and Delhi on 31st of Oct’21 and between Seattle and Bengaluru on 4th of Jan’22. The company has already received sizable slots of Jet Airways which will help it to expand international operations faster. We believe that INDIGO’s profitability in international segment would further improve with concentrated operations by increasing ATM and number of destinations. Allotment of premium slots of Jet Airways helped the company on PLF as well as on pricing front, which would continue to benefit the company once international air travel normalizes post pandemic. All these would improve its operating margin.

32

Exhibit 13: Expansion in domestic and international destinationsDestinations FY17 FY18 FY19 FY20 FY21Domestic 38 50 52 62 65

International 6 8 16 24 10

Total 44 58 68 86 75Source: Company

Exhibit 14: Fleet addition to remain strongFY17 FY18 FY19 FY20 FY21 Cagr FY17-21

(%)FY22E FY23E FY24E

Fleet 108 132 160 217 262 24.8 285 266 277

Additions 24 28 57 45 23 (19) 11 23

Source: Company; RSec Research

Exhibit 15: International Destinations under Code Share with Turkish AirlinesAmsterdam Budapest Malta Tel Aviv London

Athens Copenhagen Paris ViennaBrussels Dublin Prague Zurich

Source: Company

V. Tactical Shift in Focus to Regional Connectivity

INDIGO’s single-type aircraft model has rationalized staff training and aircraft maintenance cost, while a younger fleet has kept fuel cost much lower than its peers. Average fuel efficiency/ASK improved by 12-15% with new NEO aircrafts. The company has executed this plan successfully and it is the only domestic carrier to have reported profit for the previous 10 years (barring FY20 and FY21 due to pandemic) in a row. However, in light of emerging regional opportunities, it is now transitioning away from a single-type fleet model and metro route focus. In 2018, INDIGO signed a non-binding agreement to purchase 58 ATR-72 aircrafts for foraying into the government’s regional aviation scheme i.e. Ude Deshka Aam Naagrik (UDAN). UDAN entails the regional airport development and regional connectivity scheme (RCS) of the Government of India (GoI), aimed at expanding affordable air travel, which would spur inclusive job growth and infrastructure development on a wider regional scale. The scheme caps the maximum fare at Rs 2,500/hour of flight for 50% seats, connecting unserved and under-served regional airports, while the remaining 50% seats are allowed to be priced at market rate. To make the routes commercially viable for domestic private airlines, the GoI offers reduced excise duty and VAT on fuel and exemptions on landing, parking and terminal navigation landing charges. INDIGO believes incremental growth will come from Tier-II/III cities and thus justifies the purchase of smaller aircraft to effectively cater to this demand. While the company’s change in strategy to own flights and moving away from one fleet model will lead to some savings on rental outflow and drive regional growth, it would lower the benefits derived from single fleet model like savings on staff training and maintenance. We believe that overall route expansion through UDAN scheme would increase overall passenger base through bigger shift from railway to aviation, going forward. Better scale and constant rising passenger base would provide better distribution of fixed cost and higher profitability.

VI. Healthy Financials, Strong Balance-sheet & Robust Business Stability

Over FY10-FY20, INDIGO’s ASK in domestic segment increased by 708%, which is 4x of the ASK growth of domestic aviation industry over the same period. Despite such sustained high growth, INDIGO has maintained stable PLF, primarily due to its new timeslots and destinations.

Besides fuel price, we think competitive intensity plays a critical role in profitability, as demonstrated by improvement in PBT/ASK in FY13 and FY15. This was due to the bankruptcy of Kingfisher (Oct’12) and financial distress faced by SpiceJet (Dec’14), which dampened the competitive intensity during those periods. Similar benefit can be expected once the scenario recovers post pandemic, as competitive intensity is slightly lower and other players becoming weaker to sustain the turbulence. We believe INDIGO’s strong balance sheet support is the key parameter for sustaining and improving profitability, going forward.

33

Exhibit 16: Fuel Cost/ASK and PBT/ASK Trend


Operating Matrix: Since FY12, INDIGO has forayed into international segment and in 1HFY20, 21% of its ASK came from the international segment. The company’s overall aircraft utilisation (represented by active hours/day) over FY14-FY19 improved by 17% to 12.4 hours/day in FY19, though it dropped marginally to 11.7hours/day in FY20, due to initial impact of COVID-19, while idle hours declined by ~24%. ATM/destination increased by 300% over FY10-19.

INDIGO is highly profitable compared to peers, as decent cash generation and better returns supported its balance sheet over the years. Moreover, its asset light model with operating lease model resulted in healthy cash and cash equivalent on the balance sheet. It has a cash and cash equivalent to the tune of Rs170bn (free cash of Rs56.2bn) as of FY21-end. While the very survival of aviation industry is a big challenge due to COVID-led disruptions, we believe INDIGO is most capable to sail through the tough times on the back of its balance sheet strength. In given challenging situation, wherein survival of the fittest is the mantra, some small players may be out of the business, in case the business environment becomes worse or takes more time to improve. Therefore, we believe INDIGO would gain some incremental market share, going forward and would have better pricing to achieve better profitability.

(1.5)

(1.0)

(0.5)

-

0.5

1.0

1.5

2.0


(Rs)


34

Outlook & ValuationWe expect INDIGO’s revenue/PAT to record 14%/110% CAGR over FY19-FY24E, on the back of following factors:

• ASK: We expect 9% CAGR over FY20-FY24E, slightly higher than its historical average on the back of revival from pandemic. We expect the gap between INDIGO and the industry ASK growth rates to narrow down over FY22-FY23E, as the market share gain is already played out and is relatively subdued in international segment.

• PLF: We expect PLF of 78% over FY23-24E, lower than level of 87% recorded in FY18-FY19.

• Gross Profit (ex-Airport Charges)/ASK: On the cost front, we expect INDIGO to consolidate operations in FY22E post sharp increase in number of destinations in FY18-20. We believe that this would signal a period of improving profitability. Moreover, reduced competition would benefit the company on profitability front.

• Other Cost/ASK: We expect similar to a slight increase in salary/ASK, ownership cost/ASK and overheads/ASK over FY20-FY24E.

Over the previous three years (FY17-FY19, pre-pandemic period), INDIGO has traded at a median 1-year forward EV/EBITDAR of 9.5x, higher than its current valuation (6.1x FY24E EV/EBITDAR). Our FY24E target based on EV/EBITDAR multiple of 7.5x is lower than its current FY23E multiple and lower than its 3-year median 1-year forward EV/EBITDAR multiple of 9.5x. We believe the lower target multiple is justified, as the last 3-year median multiple was negatively affected by depressed earnings in FY19. The stock currently trades at 11.5x FY23E and 6.1x FY24E EV/EBITDAR. We believe that INDIGO would outpace the industry growth on the back of market share gain and higher growth in international segment. Additionally, we expect the industry to witness strong rebound during post pandemic period, as we expect sudden jump in travel by passengers, post lockdown/restrictions. Moreover, lower competition and higher earnings growth would attract slightly better than average valuation multiple. On the other hand, ongoing uncertainty pertaining to COVID would keep the valuation at lower end. Therefore, we assign 7.5x multiple to arrive its fair value. Considering strong market share position, undisputed leadership, best cost structure and potential in the fastest growing aviation sector, we initiate coverage on INDIGO with BUY and 2-Year Target Price of Rs2,750, valuing the stock at 7.5x FY24E EV/EBITDAR.

35

Profit & Loss StatementY/E Mar (Rs mn) FY20 FY21 FY22E FY23E FY24E

Net revenue 3,57,560 1,46,406 2,11,272 4,10,977 5,54,920

Expenditure 3,17,178 1,46,661 2,18,263 3,25,741 4,02,064

Fuel 1,24,538 38,313 85,173 1,41,093 1,75,268

Employee Expenses 43,954 30,262 36,314 41,761 47,065

Other expenditure 1,48,687 78,086 96,776 1,42,886 1,79,731

EBITDA 40,382 (255) (6,991) 85,236 1,52,856

EBITDAR 45,348 46,987 (2,824) 89,630 1,57,990

Depreciation and amortization expense 39,736 (47,241) 46,189 51,701 57,480

EBIT 645 10,363 (53,181) 33,535 95,376

Non-operating income 15,362 21,420 12,436 14,301 16,018

Interest including finance charges 18,759 (58,298) 22,591 26,827 26,090

Reported pre-tax profit (2,751) (58,298) (63,335) 21,009 85,304

Less: taxes (269) - - - 21,326

Reported net profit for shareholders (2,482) (58,298) (63,335) 21,009 63,978

EPS (Rs), based on fully diluted shares (6.5) (151.6) (164.6) 54.6 166.3

Fully diluted shares outstanding (mn) 384 384 385 385 385

Key Financials

Balance SheetY/E Mar (Rs mn) FY20 FY21 FY22E FY23E FY24E

Equity capital 3,848 3,849 3,849 3,849 3,849

Reserves and surplus 54,776 (3,140) (66,475) (45,467) 18,511

Total equity 58,624 709 (62,626) (41,618) 22,360

Deferred tax liability (net) (2,949) (2,949) (2,949) (2,949) (2,949)

Total borrowings 2,23,801 2,98,597 3,01,209 3,35,344 3,26,122

Minority interest - - - - -

Current liabilities 1,38,059 1,31,154 1,38,422 1,42,489 1,52,552

Total liabilities 4,17,535 4,27,511 3,74,055 4,33,266 4,98,085

Cash and cash equivalents 1,08,294 1,12,271 67,899 66,058 1,15,178

Inventory 2,861 3,164 1,794 2,677 3,305

Trade receivables 2,596 2,192 1,736 3,378 4,561

Other current assets 39,606 48,110 30,293 46,269 57,785

Total current assets 1,53,357 1,65,737 1,01,722 1,18,382 1,80,829

Gross block 2,25,551 2,92,911 3,41,290 4,31,411 4,85,626

Less: depreciation and amortization 57,769 1,04,756 1,45,943 1,97,406 2,53,343

Add: capital work-in-process 1,402 717 439 505 581

Total fixed assets 1,69,184 1,88,872 1,95,787 2,34,509 2,32,864

Investments 94,994 72,902 76,547 80,374 84,393

Total assets 4,17,535 4,27,511 3,74,055 4,33,266 4,98,085

36

Cash Flow StatementY/E Mar (Rs mn) FY20 FY21 FY22E FY23E FY24E

Operating cashflow

Pre-tax income (2,751) (58,298) (63,335) 21,009 85,304

Add: depreciation and amortization 39,736 46,987 46,189 51,701 57,480

Add: interest expense (net) 13,645 16,197 22,591 26,827 26,090

Less: other adjustments 5,939 (9,444) (49,709) (48,190) (53,441)

Less: taxes paid (3,062) (719) - - (21,326)

Add: working capital changes 15,927 (10,926) 26,911 (14,434) (3,263)

Total operating cashflow 69,433 (16,204) (17,354) 36,914 90,843

Investing cashflow

Capital expenditure (23,301) 26,444 (8,782) (10,100) (11,615)

Investments (26,061) 4,647 (3,645) (3,827) (4,019)

Others 3,693 1,367 5,387 (32,135) 9,222

Total investing cashflow (45,669) 32,457 (7,040) (46,062) (6,411)

Financing cashflow

Share issuances 241 92 - - -

Loans (21,661) (17,554) 2,613 34,135 (9,222)

Dividend (2,318) - - - -

Interest Payment (340) (292) (22,591) (26,827) (26,090)

Less: Others 22,545 5,478 - - -

Total financing cashflow (1,533) (12,277) (19,978) 7,307 (35,311)

Net change in cash 22,231 3,977 (44,372) (1,841) 49,120

Opening cash 86,064 1,08,294 1,12,271 67,899 66,058

Closing cash 1,08,294 1,12,271 67,899 66,058 1,15,178

Key RatiosY/E Mar FY20 FY21 FY22E FY23E FY24E

Growth Ratios (%)Net revenue 25.5 (59.1) 44.3 94.5 35.0

EBITDAR 24.1 NA NA NA 76.3

Adjusted net profit NA NA NA NA 204.5

Other Ratios (%)

Effective tax rate 9.8 - - - 25.0

EBITDAR margin 12.7 1.7 (1.3) 21.8 28.5

Adjusted net income margin (0.7) (39.8) (30.0) 5.1 11.5

RoCE 7.8 (12.8) (15.3) 18.2 26.3

Total asset turnover ratio (x) 0.9 0.3 0.5 1.0 1.2

Inventory days 3 8 3 2 2

Debtor days 3 5 3 3 3

Creditor days 16 39 31 14 13

Per share numbers (Rs)Diluted earnings (6.5) (151.6) (164.6) 54.6 166.3

Free cash 120.0 26.6 (67.9) 69.7 205.9

Book value 152.6 1.8 (162.7) (108.2) 58.1

Valuations (x)P/E (305.9) (13.0) (12.0) 36.2 11.9

EV/EBITDAR 19.3 370.9 (351.8) 11.5 6.1

P/B 12.9 1,071.0 (12.1) (18.3) 34.0 Note: NA - Not Applicable

37

Company OverviewInterGlobe Aviation (INDIGO) is an Indian airline headquartered in Gurugram (Haryana). It is the largest airline in India by passengers carried and fleet size and the sixth largest carrier in Asia with >75mn passengers carried in FY20. The airline was founded as a private company by Rahul Bhatia of InterGlobe Enterprises and Rakesh Gangwal. It took delivery of its first aircraft in Jul’06 and commenced operations a month later. INDIGO is India’s largest passenger airline with a market share of 53% as of FY21-end. The airline operates 1,500 flights every day to 94 destinations – ~70 domestic and 24 international destinations. It has its primary hub at Indira Gandhi International Airport, Delhi. It primarily operates in India’s domestic air travel market as a low-cost carrier with focus on three pillars: (1) low fares; (2) on-time services; and (3) courteous and hassle-free experience. The airline became the largest Indian carrier by passenger market share in 2012 and the company was listed on stock markets in Nov’15. Promoters’ shareholding stands at 74.9% as of 1QFY22 (Mr. Rahul Bhatia and group: 37.9%; Mr. Rakesh Gangwal and group: 23.1%; Chinkerpoo Family Trust (Trustee: Shobha Gangwal & J.P. Morgan Trust Company of Delaware): 13.6%)

Key Management

Name Designation Brief Profile

Mr. Meleveetil Damodaran

Chairman & Independent Director

Mr. Damodaran has held several important positions in the central and state governments and in India’s financial sector, including Chairman of SEBI, UTI and IDBI and Chief Secretary of the Government of Tripura. After successful tenure at UTI, IDBI (where he led the turnaround efforts) and SEBI (where he introduced improved corporate governance practices), he set up Excellence Enablers Pvt. Ltd., a corporate governance and board advisory consultancy firm.

Mr. Rahul Bhatia Director

Mr. Bhatia is also the Group MD of InterGlobe Enterprises. He holds a Degree in Electrical Engineering from the University of Waterloo in Ontario (Canada). He established InterGlobe Enterprises in 1989. He has a substantial experience of over 3 decades in the travel industry. Under his captainship, the InterGlobe Group diversified its portfolio, which now includes civil aviation (IndiGo), hospitality, airline management, travel commerce, advanced pilot training and aircraft maintenance engineering.

Mr. Rakesh Gangwal Director

Mr. Gangwal, a citizen of the USA, is the promoter and non-executive director of the company. He holds a Bachelor’s Degree in Mechanical Engineering from IIT, Kanpur. He also completed MBA from Wharton School, University of Pennsylvania. He has >30 years of experience in the aviation industry. Mr. Gangwal joined United Airlines in Feb’84 and served for 10 years. Then he joined Air France as an Executive VP (Planning & Development) in Nov’94. After two years, he joined the US Airways Group as President & COO. In Nov’01, he left the US Airways Group as President & CEO and was engaged in PE and consulting activities. Mr. Gangwal worked with Worldspan Technologies from Jun’03 to Aug’07 as Chairman, President & CEO.

Dr. Anupam Khanna Independent Director

Dr. Khanna, as alumni of IIT, Kanpur, holds a Master’s Degree in Electrical Engineering and Management Science/Engineering Economic Systems from Stanford University (California). He joined the World Bank in Dec’1980. From Sept’2000 till Mar’2003, he was chief economist for Shell International (London), where he was also a core member of the global scenarios team. He again joined World Bank in Sept’2003. Dr. Khanna joined INDIGO’s board in Mar’15.

Ms. Pallavi Shardul Shroff

Independent Director

Ms. Shroff is the Managing Partner of Shardul Amarchand Mangaldas & Co. with >37 years of extensive experience. She is a member of the Competition Law Review Committee, constituted by the GoI. Ms. Shroff has been closely involved with some of the most challenging litigation and arbitration matters in India. She is presently a Director on the boards of prestigious companies viz. Apollo Tyres, Trident, Asian Paints and One97 Communications (Paytm). She was conferred with ‘Lifetime Achievement Award’ at the Chambers India Awards 2019 and been recognized as one of the Most Powerful Women in Indian Business by Business Today, seven years in a row (2013-2019).

Dr. V. Sumantran Independent Director

Dr. Sumantran has been an industry leader, technocrat, academician and author, having worked in the USA, Europe and Asia through a career spanning over 35 years. He has been serving as the CMD of Celeris Technologies since 2014. He serves on several statutory boards and advisory boards in India, Europe and the USA. He is also an adjunct professor at MISI-Massachusetts Institute of Technology.

Ms. Rohini Bhatia Director

Ms. Rohini Bhatia is the non-executive director and Chairperson of the company’s CSR committee. She is also the Chairperson of InterGlobe Foundation, the philanthropic arm of InterGlobe Group. Under her guidance, INDIGO’s CSR activities gained both in depth and outreach. Ms. Bhatia holds a Diploma in Textile Designing and serves as a Director on the boards of several InterGlobe Group companies.

38

Mr. Anil Parashar Director

Mr. Parashar, a non-executive director, is a fellow member of the Institute of Chartered Accountants of India and is a graduate in Economics from Delhi University. He has previously been a director of the company from 2007 to 2015. Mr. Parashar has extensive operational and financial experience in handling various aspects of business including raising funds, capital restructuring, M&As, statutory compliances, investor relations and long-term planning. He is currently the President, CEO and Whole-time Director of InterGlobe Technology Quotient Pvt. Ltd. (ITQ), prior to which, he was the Group CFO at InterGlobe Enterprises. He is a member of InterGlobe Group’s Executive Committee and holds several positions on the boards of several InterGlobe group companies. He has >30 years of experience including leadership positions at Swiss Air and Asbestos Cement Company. He is also a representative on PHDCCI, ASSOCHAM and FICCI Forums on Taxation and Travel & Tourism.

Mr. Ronojoy Dutta Whole Time Director and Chief Executive Officer

Mr. Dutta, Whole Time Director and CEO, is a graduate from the IIT, Kharagpur. He holds Master’s in Business Administration from the Harvard Business School. An aviation veteran, he served United Airlines for ~20 years. He was an advisor to Air Canada and US Airways during their restructuring and was engaged in long-term consulting contracts with Hawaiian Airlines and Air Canada. He served on the boards of United Airlines, US Airways and Marsico Trust Funds. Mr. Dutta also has experience in Indian aviation sector having worked with Air Sahara as President for two years.

Source:

Shareholding Pattern


74.8

2.6

1.0

19.2

2.4

Promoters

Mutual Funds

Other Domestic Institutions

Foreign Institutions

Retail / Others

Key Institutional Shareholders

Name Holding (%)

Jwalamukhi Investment Holdings 2.28

BlackRock Inc 2.02

ICICI Prudential Life Insurance Co 1.01

Kotak Mahindra Asset Management Co 0.93

Vanguard Group Inc 0.83

Franklin Resources Inc 0.59

Pictet Funds 0.47

Source: BSE

39

SpiceJetAviation | India

Institutional Equity Research

Initiating Coverage | 4 October 2021

BUY2 Year Target Price: Rs105

CMP* (Rs) 75

Upside/ (Downside) (%) 39

Bloomberg Ticker SJET IN

Market Cap. (Rs bn) 45

Free Float (%) 40

Shares O/S (mn) 599

Share price (%) 1 mth 3 mth 12 mth

Absolute performance 4.1 (6.2) 49.2

Relative to Nifty 1.4 (18.0) (4.4)

Shareholding Pattern (%) Jun-21 Mar-21

Promoter 59.8 59.8

Public 40.2 40.2

Scenario Analysis Bear

Case

Base

Case

Bull

Case

Console Rev CAGR FY21-FY24 (%)

39.0 42.0 44.0

FY24E EBITDAR Margin (%)

19.9 21.4 22.8

FY24E EBITDAR (Rs mn)

27,568 31,111 34,655

Target EV/EBITDAR multiple (x)

4.0 4.5 5.0

TP (Rs.) 60 105 155

1 Year Stock Price Performance

Note: * CMP as on 1 October 2021

Increasing Focus on Profitable Cargo Biz & Likely Margin Improvement Augur Well

f SpiceJet (SJET) had the highest passenger load factor (PLF) of ~90% in the industry as of FY20, owing to which its revenue/ASK is higher than LCC market leader INDIGO.

f SJET’s net-worth turned negative and deteriorated from -Rs8.5bn in Sept’19-end to -Rs25.7bn as of FY21-end, led by adverse macro developments and COVID-19. However, its cost-restructuring initiatives and ramp up in profitable cargo segment led to lower loss, which would improve its net-worth situation, going forward.

f Focus on regional/smaller routes (less served or unserved) aided SJET to create a niche for itself. This also helped SJET to generate better yields and witness stronger growth, led by strong demand, lower competition and better fleet management. Moreover, the decision of stake sale in cargo business would strengthen its balance sheet and overall financial position.

f SJET’s clear focus on highly profitable cargo segment (20% EBITDA margin in FY21) and shifting capacity from passenger segment to cargo segment would drive profitability. Deliberate ramp down in passenger capacity during ongoing pandemic would curtail losses over near to medium term. Further, code share agreement with Emirates would allow SJET to expand its reach to more international destinations.

ESG Analysis: Analyzing SJET on 20 key criteria (10 points each) under ESG Matrix, we have assigned an overall score of 62% to the company. Under “Environmental Head”, we have assigned 54% score, as they emit radiation and consume conventional fuel. Under “Social Head”, we have assigned 60% score considering its data policy and employee and labour engagement, while under “Governance Head”, we have assigned 73% score, based on its overall governance structure (please refer to page no 44 for detailed ESG analysis).

Outlook & ValuationWe expect strong revival in aviation traffic in 2HFY22E and healthy pick-up in FY23-FY24E on the back of healthy demand for leisure travel in post COVID era. Its current valuation of 3.9x FY24E EV/EBITDAR) is below INDIGO’s 6.1x, we believe that it would continue to trade at a discount to INDIGO due to relatively weaker balance sheet, higher cost/ASK and likelihood of other LCCs entering into profitable Tier-II/III segment. Over the FY17-FY19, SJET has traded at a median 1-Year Forward EV/EBITDAR of 5x (47% discount to INDIGO). Considering improving cost structure, increasing contribution of highly profitable cargo segment, expected better margin, likely strong up-tick in aviation traffic post COVID-19 and attractive valuation, we initiate coverage on SJET with BUY and 2-Year Target Price of Rs105, valuing the stock at 4.5x of FY24E EV/EBITDAR.

Key Triggers:

Focus on PLF with niche presence in Tier-II/III citiesBenign competition in 10 out of 70 domestic destinationsDeliberate ramp down in passenger capacity to curtail losses over near term Market share gain in cargo segment and pricing power to drive profitabilityStake sale of cargo business to support balance sheet and aid business stabilityAttractive valuation





Key FinancialY/E Mar (Rs mn) FY19 FY20 FY21 FY22E FY23E FY24E

Net Sales 91,133 1,23,586 51,334 58,424 1,08,012 1,45,394

EBITDAR 12,869 8,594 4,228 1,394 25,958 31,111

EBITDAR Margin (%) 14.1 7.0 8.2 2.4 24.0 21.4

PAT (2,526) (9,348) (9,983) (11,347) 3,299 4,230

EPS (Rs) (4.2) (15.6) (16.6) (18.9) 5.5 7.0

P/E (x) (17.8) (4.8) (4.5) (4.0) 13.7 10.7

EV / EBITDAR (x) 4.2 16.6 32.2 86.6 5.1 3.9


20

40

60

80

100

120

Oct

-20

Oct

-20

Nov

-20

Dec

-20

Dec

-20

Jan-

21

Feb-

21

Mar

-21

Mar

-21

Apr

-21

May

-21

May

-21

Jun-

21

Jul-2

1

Jul-2

1

Aug

-21

Sep-

21

Sep-

21

40

Our Thesis

Key Risks

Key Sectoral Theme

Key Investment Theme

f Sharp increase in ATF prices

f Weak demand growth

f Adverse currency movement

f Further deterioration of stretched balance sheet

SpiceJet (Rs124bn - FY20)

Key Product Segment Passenger Cargo Others

Revenue (Rs mn: FY20) 1,14,428 5,448 3,690

Revenue Mix (%) 93 4 3

CAGR (FY16-FY20) (%) 24 28 40

CAGR (FY20-FY24E) (%) 4 8 3

f India’s Domestic Aviation is amongst the Fastest Growing Industry: Domestic aviation, which grew at a faster pace than most other segments of the economy over FY14-FY20 (15% CAGR in domestic aviation volumes), is expected to witness consistent growth over the next 5 years. As per back of the envelope calculation, low penetration (just ~2% of population and ~6% of urban population) provides huge potential for growth over next decade. Using the growth of China’s aviation market as a rough indicator of the direction of the Indian industry, we extrapolate that aviation industry has reached inflexion point and would continue witnessing double-digit growth, which would benefit its key players.

f Major Player in a Fast-growing Industry with Significant Entry Barriers: SpiceJet (SJET) is the second largest player in a fast-growing industry with significant entry barriers. Over the last few years, it has been augmenting its fleet sensing strong growth opportunities. Though the current pandemic has impacted its fleet strength during last one and half year, we believe it to be a temporary phenomenon. With ramp-up in vaccination coverage, we expect SJET to achieve its earlier fleet strength over the next 2-3 years. Moreover, DGCA’s recent decision to allow Max aircraft augurs well for the company, as it can use its grounded aircraft easily.

f Cargo Segment is Key Rescuer: SJET has recently increased its focus on highly profitable cargo segment, which enjoys 20% EBITDA margin as of FY21. Management aims to treble its cargo revenue in next 1-2 years with capacity increase by ~100%. Due to ongoing pandemic passenger segment has been loss making business for most of aviation companies. SJET’s rising contribution from cargo business reduces its overall losses and support its financials.

f Highest PLF in the Industry; Higher Revenue/ASK vs. LCC Market Leader: SJET enjoyed the highest PLF in the industry as of FY20-end, which is not at the cost of pricing. Its revenue/passenger km is slightly higher than INDIGO and Go First over FY16-FY20. Driven by high PLF, its revenue/ASK (RASK) is higher than the LCC market leader INDIGO.

f Focus on Smaller Routes to Drive Growth & Improve Yield: SJET has created a niche for itself through its focus on smaller routes which provide stronger growth with better yields due to lower competition. SJET is able to generate better yields from smaller and regional routes (compared to trunk routes) led by strong demand, lower competition and better fleet management.

f Rapidly Expanding International Footprint: Historically, SJET’s international pax growth has been moderate, given the capacity constraints and company’s strategy to focus on regional routes. However, it plans to expand its international presence rapidly. Currently, the company caters to ~11 international destinations vs. 7 in FY17. As a part of its international expansion strategy, SJET entered into a code share with Emirates in Apr’19, which would allow it to expand its reach across America, Europe, Africa and the Middle East.

41

EBITDAR & Target Price


1-Yr Forward EV/EBITDAR


Price Sensitivity Analysis

EBITDAR (Rs) Growth (%) EV/EBITDAR Target EV/EBITDAR multiple (x)

4.0 4.5 5.0 5.5

FY18 (-3) 17,896 3.0 107 122 137 151

FY19 (-2) 12,869 (28) 4.2 71 82 92 103

FY20 (-1) 8,594 (33) 16.6 NA NA NA NA

FY21 (Base Year) 4,228 (51) 32.2 NA NA NA NA

FY22E (Year 1) 1,394 (67) 86.6 NA NA NA NA

FY23E (Year 2) 25,958 1,763 5.1 29 50 72 94

FY24E (Year 3) 31,111 2,133 3.9 79 105 131 156

Source: Company, RSec Research; NA: Not Applicable

17,896

12,869

8,594

4,228 1,394

25,958

31,111

122

82

50

105

(150)

(100)

(50)

-

50

100

150

-

5,000

10,000

15,000

20,000

25,000

30,000

35,000

FY18 (-3) FY19 (-2) FY20 (-1) FY21 (BaseYear)

FY22E(Year 1)

FY23E(Year 2)

FY24E(Year 3)

(Rs)(Rs)

EBITDAR Target Price

0

20,000

40,000

60,000

80,000

1,00,000

1,20,000

1,40,000

1,60,000

Mar

-15

Jun-

15Se

p-15

Dec-

15M

ar-1

6Ju

n-16

Sep-

16De

c-16

Mar

-17

Jun-

17Se

p-17

Dec-

17M

ar-1

8Ju

n-18

Sep-

18De

c-18

Mar

-19

Jun-

19Se

p-19

Dec-

19M

ar-2

0Ju

n-20

Sep-

20De

c-20

Mar

-21

Jun-

21Se

p-21

EV 3.5 X 4 X 4.5 X 5 X 5.5 X

42

Scenario AnalysisRevenue & Margin Sensitivity on Standalone Earnings

Bear Case Base Case Bull CaseConsole Rev CAGR FY21-FY24 (%) 39.0 41.0 44.0

FY24E EBITDAR Margins (%) 19.9 21.4 22.8

FY24E EBITDAR (Rs mn) 27,568 31,111 34,655 Source: RSec Research

Bear Case Scenario: In Bear Case scenario, we expect SJET’s revenue to clock 39.0% CAGR over FY21-FY24E (assuming lower growth in international business and marginal market share fall in domestic business), while FY24E EBITDAR margin is pegged at 19.9%. Assigning 4x EV/EBITDAR multiple to its FY24E EBITDAR, we arrive at a Target Price of Rs60.

Base Case Scenario: In Base Case scenario, we expect SJET’s revenue to clock 41.0% CAGR over FY21-FY24E (assuming higher growth in international business), while FY24E EBITDAR margin is pegged at 21.4%. Assigning 4.5x EV/EBITDAR multiple to its FY24E EBITDAR, we arrive at a Target Price of Rs105.

Bull Case Scenario: In Bull Case scenario, we expect SJET’s revenue to clock 44.0% CAGR over FY21-FY24E (assuming higher growth in international business and market share gain in domestic business), while FY24E EBITDAR margin is pegged at 22.8%. Assigning 5x EV/EBITDAR multiple to its FY24E EBITDAR, we arrive at a Target Price of Rs155.

Price Target Across ScenarioFY24E EBITDAR Down-cycle Target Up-cycle

(Rs mn) Multiple Multiple Multiple1 Yr-Fwd EV/EBITDAR 4 4.5 5

Bear Case (Rs) 27,568 60 83 106

Base Case (Rs) 31,111 79 105 131

Bull Case (Rs) 34,655 97 126 155Source: RSec Research

43


Management Quality 6 LowThe management is capable to manage tough situations like pandemic and has a fair control of business; in the past, it had poor track record in terms of financial management, which has improved over the years; the management is trying its best to manage business/financial during the ongoing challenging situation

Promoter's Holding Pledge 2 High Overall promoters’ holding is 59.5%, out of which 44% is pledged

Board of Directors Profile 6 LowIts board of directors have experience across various industry domains; SJET’s total board strength is 5, out of whom 4 (80%) are non-executive directors (out of whom 3 are independent directors); out of 5 directors, 1 is an executive director

Industry Growth 8 LowDomestic aviation industry is expected to witness high double-digit growth over FY21-FY24E (at 44% CAGR) albeit on a low base; very low penetration in India would support high growth in next decade

Regulatory Environment / Risk 3 HighAviation industry is highly regulated by DGCA; again, as most airlines have global footprint, they are vulnerable to external global factors such as political tension and economic conjuncture; it also has various restrictions from various government authorities domestically as well as internationally

Entry Barriers / Competition 6 LowAviation industry has a very high entry barriers being highly capital-intensive industry and various regulations for getting approvals/licenses; however, the industry has always exhibited higher level of competitive intensity despite very few players are actively operational; though SJET has been losing market share in recent times, we expect strong bounce back with approval for max aircraft

New Business/Client Potential 8 LowThe company has been consistently adding new aircraft, new routes in Tier-II/ III cities; during the last 3-4 years, it has increased focus on international routes to expand business and profitability; it has potential to expand global footprint through tie-ups and code sharing agreements

Business Diversification 8 LowThe company has stable and diversified revenue streams i.e. primary (passenger air travel) and ancillary (preferred seating, business class, SpiceMax, loyalty programmes, insurance, meals, Spice vacations, lounge, Visa, cab, cargo, onboard merchandise); cargo business contributes 25% to its overall revenue; however, as everything is related to aviation industry, it has limited diversification

Market Share Potential 7 LowRecently, the company lost some market share due to the pandemic; it is expected to regain some lost market share with launching few new routes in 2QFY22 and approval to resume grounded max aircraft

Margin Expansion Potential 8 Low EBITDAR margin is expected to decline by 590bps in FY22E and improve by 2,160bps in FY23E and decline by 260bps in FY24E, respectively

Earnings Growth 8 LowWe expect it to turnaround in FY24E from current losses due to the ongoing pandemic; we expect it to record PAT of Rs4.2bn in FY24E as against Rs9.9bn net loss in FY21

Balance Sheet Strength 2 HighBalance sheet is under stress due to mounting losses in FY20 and FY21 due to pandemic-led disruptions; at present, the company is facing liquidity issue and would need more money to run business; strategic divestment of cargo business is expected to support its financial and balance sheet, going forward

Debt Profile 1 HighIts balance sheet is very much stretched at this juncture and its net Debt has increased from Rs8.2bn to Rs71bn over FY17-FY21; moreover, its net-worth continues to remain negative since FY12

FCF Generation/NWC 2 High Constant losses and mounting debt level to continue impacting SJET’s cash flow, which is expected to remain negative till FY23E

Dividend Policy 1 High The company has not given any dividend in last 5 years


Average Score (%) 51% Low


44


EnvironmentalClimate Change & Carbon Emission 4 High

Air travel accounts for ~2% of global carbon emissions; SJET is committed to use energy efficient equipment to reduce carbon footprint; in a first-of its-kind initiative, it has launched electric tarmac coaches at Chennai Airport (a new sustainability benchmark in Indian aviation) that will considerably reduce carbon footprint

Air & Water Pollution 4 High

Though by nature of the business SJET being aviation company, is responsible for high air and water pollution, SJET has undertaken adequate measures to reduce GHG emission by using fleet renewal, investment in cleaner vehicles and equipment, maintenance of engine and airframe, flight planning and training to operational staff etc.; by investing in a fuel-efficient fleet, emission free battery-operated ancillary equipment, SJET is improving its financial performance as well as fulfilling environmental responsibility

Biodiversity 6 Low In their efforts to go green, the company has encouraged the use of digital flight manuals in place of paper manuals to remove considerable paper load across their fleet and reduce wastage

Deforestation 2 HighIn order to boost the connectivity to remote areas of the country and making air travel affordable to everyone, a lot of new airports are being built, which involve massive deforestation

Energy Efficiency 6 LowSJET is highly conscious of the criticality of the conservation of energy at all operational levels particularly of ATF, which is the leading energy source for aviation activity; adequate measures are undertaken to reduce energy consumption whenever possible by using energy-efficient equipment and technology infusion such as maintenance of engine and airframe, flight planning, training to operational staff and regular analysis etc.

Waste Management 6 LowThe services provided by SJET do not generate any waste which requires recycling; however, it ensures that the wastes generated across their offices are disposed off as per applicable waste disposal norms

Defence / Arms / Ammunition Exposure 10 Low No exposure to arms and ammunition space

Social

Customer Satisfaction 6 LowThe company is rated medium on customer satisfaction in terms of its service and on-time performance; it continues to be the second most preferred aviation company for Indian passengers

Data Protection & Privacy 8 Low The company maintains high level of data protection and privacy of customers’ data/details; it follows confidentiality policy

Gender & Diversity 8 Low Out of total 11,675 employees, ~4,100 are permanent women employees (~35%)

Employee Engagement 7 LowThe company conducts various employee-engagement programmes i.e. safety training, skill up-gradation, and cultural activities to ensure an employee-friendly environment

Community Relations / Service 4 HighAs the company’s profitability and cashflow is adversely impacted, its spend on CSR activities is less than the required regulatory threshold (the company spent Rs6.8mn towards its CSR activities in FY20)

Human Rights 6 Low It has proper human rights policy in place, which is applicable to all stakeholders as well as to all group subsidiaries

Labour Standard 3 HighThe company follows labour standards in terms of workplace, facilities and employee benefits; however, it does not have any company-recognized employee association

Environmental, Social & Governance Matrix (ESGM)

45

Governance

Audit Committee Structure 5 MediumAs on March 31, 2020, SJET’s audit committee comprised of three Independent directors and one Non Executive and Non Independent Director; the committee met four times in FY20 and all the directors were present in all meetings; all members of the committee have requisite expertise in financial management domain

Bribery & Corruption 7 LowThe company has an exhaustive code of conduct covering all aspects of ethical practices with emphasis on adoption of the highest standards of personal ethics, integrity, confidentiality and discipline, which is applicable to all stakeholders i.e. suppliers, business partners, and subsidiaries etc.

Executive Compensation 7 LowThe ratio of chairman’s remuneration to the median remuneration of employees stood at 750x in FY20; while, the ratio of INDIGO’s chairman’s remuneration to the median remuneration of employees stood at 5.4x during the same period

Lobbying 9 LowAs the company has decent track record of service delivery, it does not require any lobbying/similar tactics for business expansion; moreover, no carteling is observed in this industry

Political Contribution 8 Low In past company had political connection through one of the promotors, while at present no noticeable political contribution/connection is observed

Whistleblower Scheme 8 LowThe company has established a whistleblower policy to enable all stakeholders (including directors and employees) to report any unethical behaviour, actual/suspected fraud or violation of any code of conduct; the company affirms that no director/employee has ever been denied access to the audit committee


Total Score (%) 62% Low



46

Key Highlights of Management Discussion f The management has increased focus on highly profitable cargo business over

last 12-18 months to improve profitability. The company recorded EBITDA margin of 20.2% in cargo segment in FY21, which it expects to increase further with better scale, improved utilization and higher contribution from international routes.

f The company aims to double its cargo capacity in next 1 year from existing 18 aircrafts by adding new aircrafts and diverting some passenger capacity to freighter. It aims to treble its cargo revenue over next 2 years with capacity addition and increase in utilization with multi-modal platform.

f Recently, SJET has deliberately ramped down passenger capacity to arrive at right sizing based on current pandemic situation and various restriction, which has helped it to curtail overall losses in the near-term. The management would not be aggressive in expanding passenger capacity at least till situation normalizes and significant improvement in PLF. It expects SJET’s market share to stabilize at ~10% over the next 1 year.

f The company has increased its focus on international charters to lower volatility in domestic passenger RASK, which has been supporting its overall PLF.

f The company has recently taken 10-15% hike in cargo freight to improve profitability. Moreover, in cargo segment, it has an arrangement of power by hour with the vendors for its international operation, which helps it on cost front.

f The management is confident of improvement in balance sheet position by partial stake divestment in its cargo business, which would lower its debt position and improve liquidity over the medium-term.

f SJET is planning to resume commercial operation of Boeing 737 Max planes from the first week of Oct’21 (subject to regulatory approvals), as the Directorate General of Civil Aviation (DGCA) has recently lifted the ban on these narrow-body aircrafts, which were grounded in Mar’19. The first batch of 20 pilots are being trained at SpiceJet Training Academy in Gurgaon and Boeing simulator facility in Noida.

47

Key Charts

Exhibit 1: Passenger Traffic and ASK over the years


Exhibit 2: Market Share & PLF Trend over the Years

Source: DGCA

Exhibit 3: Revenue, EBITDAR & EBITDAR Margin over the Years


Exhibit 4: Fuel cost/ASK & PBT/ASK


f ASK is expected to clock 41% CAGR over FY21-FY24E. Despite present ramp down in passenger capacity, we expect SJET's capacity to reach pre-covid level in FY24E.

f The second largest player in India’s domestic aviation industry with 14% market share in terms of passenger kms as of FY21-end and enjoys the highest PLF in the industry.

f Healthy revenue CAGR to support margin expansion in FY24E. EBITDAR margin is expected to expand by 1,320bps over FY21-FY24E to 21.4%.

f PBT/ASK is expected to turn positive in FY23E and FY24E. Sharp bounce back in air passenger traffic would support yield and pricing power, which would lead historic profitability.

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Key Investment Rationale

Our investment thesis is based on the following premises: I. Major Player in a Fast-growing Industry with Significant Entry Barriers

II. Stake Sale in Cargo Biz to Support Financials; Higher Focus on Cargo Biz is Key Turnaround Story

III. Highest PLF in the Industry; Higher Revenue/ASK vs. LCC Market Leader

IV. Strong Presence in Key Airports with Limited Competition

V. Continued Focus on Smaller Routes to Drive Growth & Improve Yields

VI. Rapidly Expanding International Footprint

I. Major Player in a Fast-growing Industry with Significant Entry Barriers

Over FY14-20, India's domestic aviation’s revenue passenger kilometer (RPK) clocked a CAGR of 15%. SJET is the second largest player in India’s domestic aviation industry with 14% market share in terms of passenger kms as of FY21-end. In this industry, the early movers get an advantage, in our view, in terms of having the lucrative time-slots at airports. We believe new slots are likely to be less lucrative than the time slots already available with the incumbents. Further, the industry has scale benefits, with large scale leading to lower overheads and higher asset turns, which is imperative in a commoditized industry.

Over the last few years, SJET has been aggressively augmenting its fleet sensing strong growth opportunities. Though the current pandemic has impacted its fleet strength during last one and half year, Jet Airways’ closure gave a major thrust to SJET’s fleet augmentation in form of induction of 27 Boeing 737s from Jet Airways in its fleet. Overall, it added 29 aircrafts in 1QFY20, taking its fleet to 104 as of 1HFY20. However, this has declined to <50 aircrafts currently, which we believe to be a temporary phenomenon led by pandemic-led disruptions. With ramp-up in vaccination coverage, we expect SJET to achieve its earlier fleet strength over the next 2-3 years. Moreover, DGCA’s recent decision to allow Max-8S aircraft augurs well for the company, as it can use its grounded aircraft easily. Earlier, SJET’s overall market share had risen from 12.8% in Mar’19 to 16.9% in Jun’20, which declined to ~10% in last one year due to pandemic-led disruptions, as it temporarily discontinued few routes to curtail overall loss. However, we expect gradual recovery in market share along with improvement in situation on the back of increasing vaccination coverage. We expect its market share to reach 12% by FY24E.

Exhibit 5: Passenger Traffic and ASK over the Years

Source: DGCA

SJET ordered 205 Boeing 737 MAX aircrafts (order of 50 aircrafts placed in 2014 and 155 placed on Jan’17), out of which it had received deliveries of 13 Max-8S, which are currently grounded. With DGCA’s latest approval SJET is hopeful of resumption of Max-8S operations in the first week of Oct'21.

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II. Stake Sale in Cargo Biz to Support Financials; Higher Focus on Cargo Biz is Key Turnaround Story

SJET earlier launched its dedicated air cargo service under the brand ‘SpiceXpress’ with one Boeing Freighter aircraft and inducted few more freighters immediately after launch. Moreover, due to pandemic-led increasing freight load including delivery of COVID vaccines, the company inducted 2 (added a Boeing 767 and Airbus A330 to its cargo fleet) additional freighters taking the total strength to 18 freight aircrafts at present. Currently, SpiceXpress has 9 scheduled departures for 6 days a week to Hong Kong from Delhi, Kolkata and Guwahati and 1 domestic rotation connecting Hyderabad, Delhi, Mumbai, Bengaluru and Chennai. SpiceXpress will soon start operating scheduled services on few other routes from Delhi. Scaling up of this business helped SJET in increasing its contribution to overall revenues from 1.5% in FY20 to 22% in FY21. Moreover, it turned profitable and recorded Rs1.3bn profit in FY21. Recently, the company is planning to divest stake in this business to improve its cash position and balance-sheet strength. Considering Cargo business’ profitable performance and latest financials, it would be able to raise ~Rs20-25bn through stake sale, which would aid its overall cash position. Management plans to double its freighter capacity to 35 aircrafts over next 1-2 years with an intention to treble its cargo revenue from current level. This would result into remarkable improvement in overall profitability going forward. Cargo business would be biggest turnaround story for SJET.

Exhibit 6: SpiceXpress Financials Cargo (Rs Mn) FY20 FY21Revenue 1,806 11,175

EBITDA (765) 2,258

Net Profit (1,340) 1,310

Cargo Tonnage (in Tonne) 1,56,262 1,43,268

Cargo Rev/Tonnage 0.03487 0.07800Source: Company

III. Highest PLF in the Industry; Higher Revenue/ASK vs. LCC Market Leader

SJET enjoys the highest PLF in the industry as of FY20-end, which is not at the cost of pricing. Its revenue/passenger km is slightly higher than INDIGO and Go First over FY16-FY20. Driven by high PLF, its revenue/ASK (RASK) is higher than the LCC market leader INDIGO.

Exhibit 7: PLF of all Industry Players over Last 5 Years

Source: DGCA

Marginally Higher Average Cost/ASK Despite Lowest Active Hours & Core Staff: SJET’s active hours and core staff (pilots and in-flight crew) – as a proportion of total employees – is the lowest among LCCs in FY20 due to its dispersed operations and focus on profitability. Over FY16-FY20, it added 23 new destinations to earlier 40 destinations it had as of Mar’16 and has created a niche for itself in Tier-II cities. Generally, Tier-II cities have lower ATMs vs. large metro cities. Generally, lower active hours lead to higher ownership cost/ASK, while dispersed operations lead to higher overheads/ASK. Despite SJET’s higher market share of 14% as of FY21-end, its average cost/ASK over FY16-FY20 was slightly higher than (a) Air Asia-India (market share is half of SJET); and (b) Go First (market share is two-thirds of SJET).

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IndiGo Spicejet Jet Airways Go First Air India Air Asia Vistara

50

IV. Strong Presence in Key Airports with Limited Competition

In our analysis, we have considered the Top-6 airlines (INDIGO, SJET, Go First, Vistara, Air Asia-India and Air India), which jointly enjoy 99% market share in terms of passenger kms in India’s domestic aviation market as of Mar’21. As out of SJET’s operations in domestic 56 airports, ~8 airports are serviced by SJET only at present, we believe competition is non-existent at these airports. 20 airports are serviced by 2-3 airlines, including SJET. In most of these airports, INDIGO and/or Air India is also present. We believe, this implies that it is effectively a duopoly between INDIGO and SJET at these airports, as Air India has a higher cost structure compared to them. We believe the competition is low even at these 20 airports. The bulk of these airports are in Tier-II cities with lower air travel vs. metro cities. Thus, while profit margin may be higher at Tier-II cities due to low competition, volume is lower vs. metro airports. The new entrants in the Indian aviation industry (Go First, Air Asia-India and Vistara) have little presence at the airports, which are serviced by 1-3 airlines.

Exhibit 8: Market Share Trend (Based on RPK)

Source: DGCA

V. Continued Focus on Smaller Routes to Drive Growth & Improve Yields

SJET has created a niche for itself through its focus on smaller routes, which provide stronger growth with better yields due to lower competition. The company is able to generate better yields from smaller and regional routes (compared to trunk routes) led by strong demand, lower competition and better fleet management.

Niche Route Strategy & Reduced Competition: Focus on expanding regional routes (less served or unserved) has helped SJET to earn better yields, as the competition is less. Further, SJET operates regional fleet of 84-seater Q400s, which help it maintain better load factors. SJET continues to enjoy the best load factors in the industry over the past few years, led by better management of aircrafts across domestic routes. Hence, the company has better yields compared to INDIGO, which has comparatively higher focus on trunk routes. Also, SJET’s 13 Max-8 aircrafts were grounded post the Ethiopian Airlines’ Max-8 crash in Mar’19, however recent approval of government to fly Max-8 aircraft would improve company's cost structure, as they have better fuel efficiency. Whilst the load factor might moderate, going ahead due to aggressive capacity expansion, we believe it would be still better than the industry.

VI. Rapidly Expanding International Footprint

Earlier, SJET was benefitted from getting disproportionate slots of Jet Airways, which has helped it on expanding international business. Overall, SJET has been allotted 48/15 domestic and international departure slots in Mumbai and Delhi, respectively. With more international slots, it would expand its international operations faster. Expected revival of Jet Airways is too long process and it would be very difficult to regain lost shares and routes over the medium-term, as Jet Airways needs to apply for slots as a new entrant.

Historically, SJET’s international pax growth has been moderate, given the capacity constraints and company’s strategy to focus on regional routes. However, it plans to expand its international presence rapidly. Currently, the company caters to 11 international destinations vs. 7 in FY17. As a part of its international expansion strategy, SJET entered into a code share with Emirates in Apr’19, which would allow it to expand its reach across America, Europe, Africa and the Middle East.

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Exhibit 9: List of International destinations – Adds Ras-Al-Khaimah to be the 11th destinationBangkok Kabul Riyadh

Colombo Kathmandu Sharjah

Dubai Male Ras-Al-Khaimah

Guangzhou Muscat

Source: Company

Outlook & ValuationWe expect strong revival in aviation traffic in 2HFY22E and healthy pick-up over FY23-FY24E on the back of healthy demand from leisure travel by passengers, who have been withholding their regular travel due to pandemic. We factor in 1% CAGR in ASK over FY20-24E (vs. 27% CAGR over FY18-20) and 1,440bps expansion in EBITDAR margin over the same period, due to cost-restructuring and better pricing power. While its current valuation of 3.9x FY24E EV/EBITDAR) is below INDIGO’s 6.1x, we believe that it should trade at a further discount to INDIGO due to: relatively weaker balance sheet; higher cost/ASK; and (c) likelihood other LCCs entering into profitable Tier-II segment. We value SJET at 4.5x of FY24E EV/EBITDAR, a 40% discount to our FY24E target multiple for INDIGO (7.5x). Over FY17-FY19 SJET has traded at a median 1-year forward EV/EBITDAR of 5x (47% discount to INDIGO). Considering it being second largest player in fastest growing Indian aviation industry, improving cost structure, increasing focus on highly profitable cargo segment, expected better margin ahead and attractive valuation, we initiate coverage on SJET with BUY and 2-Year Target Price of Rs105 (valuing the stock at 4.5x FY24E EV/EBITDAR).

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Profit & Loss StatementY/E Mar (Rs mn) FY20 FY21 FY22E FY23E FY24E

Net revenue 1,23,586 51,334 58,424 1,08,012 1,45,394

Expenditure 1,18,621 49,591 59,737 87,969 1,22,039

Fuel 46,162 15,288 21,230 34,264 52,096

Employee Expenses 15,258 6,790 8,283 9,112 10,023

Other expenditure 57,201 27,513 30,224 44,593 59,920

EBITDA 4,965 1,743 (1,314) 20,043 23,355

EBITDAR 8,594 4,228 1,394 25,958 31,111

Depreciation and amortization expense 17,339 15,580 14,130 18,830 21,765

EBIT (12,374) (13,837) (15,444) 1,213 1,590

Non-operating income 7,773 9,097 10,006 10,507 10,822

Interest including finance charges 4,747 5,243 5,909 7,839 7,253

Reported pre-tax profit (9,348) (9,983) (11,347) 3,881 5,159

Less: taxes - - - 582 929

Reported net profit for shareholders (9,348) (9,983) (11,347) 3,299 4,230

EPS (Rs), based on fully diluted shares (15.6) (16.6) (18.9) 5.5 7.0

Fully diluted shares outstanding (mn) 599 600 600 600 600

Key Financials

Balance SheetY/E Mar (Rs mn) FY20 FY21 FY22E FY23E FY24E

Equity capital 6,001 6,009 6,009 6,009 6,009

Reserves and surplus (21,793) (31,725) (43,071) (39,773) (35,543)

Total equity (15,793) (25,715) (37,062) (33,763) (29,533)

Total borrowings 98,269 91,534 73,867 92,227 85,334

Current liabilities 46,242 47,937 42,202 48,295 55,459

Total liabilities 1,28,718 1,13,755 79,007 1,06,759 1,11,259

Cash and cash equivalents 402 320 (1,737) 5,637 8,150

Inventory 1,776 1,558 491 723 1,003

Trade receivables 2,917 3,464 480 888 1,195

Other current assets 36,809 38,327 31,443 35,906 39,271

Total current assets 41,903 43,670 30,677 43,154 49,618

Gross block 1,12,074 1,10,846 1,03,278 1,37,384 1,57,183

Less: depreciation and amortization 25,265 40,844 54,974 73,805 95,569

Add: capital work-in-process - 58 - - -

Total fixed assets 86,810 70,060 48,303 63,579 61,614

Investments 5 26 26 26 26

Total assets 1,28,718 1,13,755 79,007 1,06,759 1,11,259

53

Cash Flow StatementY/E Mar (Rs mn) FY20 FY21 FY22E FY23E FY24E

Operating cashflow

Pre-tax income (9,348) (9,983) (11,347) 3,881 5,159

Add: depreciation and amortization 17,339 15,580 14,130 18,830 21,765

Add: interest expense (net) 354 1,468 5,909 7,839 7,253

Less: other adjustments 17,643 (1,316) (11,541) (16,246) (19,193)

Less: taxes paid (327) 366 - (582) (929)

Add: working capital changes (7,428) (2,364) 5,200 991 3,211

Total operating cashflow 18,234 3,750 2,352 14,713 17,267

Investing cashflow

Capital expenditure (2,528) (614) (2,500) (2,500) (2,500)

Investments (9) 54 - - -

Others 934 2,665 21,667 (15,360) 1,893

Total investing cashflow (1,603) 2,105 19,167 (17,861) (607)

Financing cashflow

Share issuances 4 9 - - -

Loans 170 (75) (17,667) 18,360 (6,893)

Dividend - - - - -

Interest Payment (1,012) (1,991) (5,909) (7,839) (7,253)

Less: Others (16,170) (3,879) - - -

Total financing cashflow (17,008) (5,937) (23,577) 10,521 (14,147)

Net change in cash (377) (81) (2,057) 7,374 2,513

Opening cash 779 402 320 (1,737) 5,637

Closing cash 402 320 (1,737) 5,637 8,150

Key RatiosY/E Mar FY20 FY21 FY22E FY23E FY24E

Growth Ratios (%)

Net revenue 35.6 (58.5) 13.8 84.9 34.6

EBITDAR (33.2) (50.8) (67) 1762.8 19.9

Adjusted net profit NA NA NA NA 28.2

Other Ratios (%)

Effective tax rate - - - 15.0 18.0

EBITDAR margin 7.0 8.2 2.4 24.0 21.4

Adjusted net income margin (7.6) (19.4) (19.4) 3.1 2.9

RoCE (31.8) (6.4) (10.6) 20.9 17.8

RoE 96.9 48.1 36.1 (9.3) (13.4)

Total asset turnover ratio (x) 1.0 0.4 0.6 1.2 1.3

Inventory days 5 11 3 2 3

Debtor days 9 25 3 3 3

Creditor days 51 122 63 50 52

Per share numbers (Rs)

Diluted earnings (15.6) (16.6) (18.9) 5.5 7.0

Free cash 26.2 5.2 (0.2) 20.3 24.6

Book value (26.3) (42.8) (61.7) (56.2) (49.2)

Valuations (x)

P/E (4.8) (4.5) (4.0) 13.7 10.7

EV/EBITDAR 16.6 32.2 86.6 5.1 3.9

P/B (2.8) (1.8) (1.2) (1.3) (1.5)

Note: NA - Not Applicable

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Company OverviewSpiceJet (SJET) commenced operations in May 2005 with 2 leased Boeing 737-800 aircrafts. The airline, which was acquired by Mr. Ajay Singh in 2004, is now the second-largest airline in the country in terms of passenger kms with a market share of 14% (as at FY21-end) in the domestic segment. It operates an LCC business model with a focus on domestic segment with the highest PLF of >90%. It flies over 54 domestic and 10 international destinations. SJET’s fleet stood at 64 aircrafts as of FY21. Promoter’s shareholding stood at 60% as of 1QFY22 (held entirely by Mr. Ajay Singh and his family). About 44% of the promoter’s holdings are currently pledged. There has not been any equity fundraising exercise since FY16. SJET has been consistently enhancing its reach by adding destination and expanding fleet. It also runs a dedicated cargo services business, SpiceXpress, which is India’s largest cargo airline.

In a recent development, SJET has been ranked at 16th place in the World Top-20 LCC category at the Skytrax 2021 World Airline Awards. Further, the airlines also jumped 31 places to achieve the 88th rank in the “World Top 100 Airlines” ranking.

Key Business Features of SpiceJet:

f Fleet Size & Capacity: As of FY20, SJET had 81 mainline Boeing fleet for key destinations, 32 Q400 for regional connectivity, 5 Freighter for passenger’s services. It carried 25.8mn passengers and 1,56,262 tonne cargo in FY20.

f Business Model: It has stable and diversified revenue streams i.e. primary (passenger air travel) and ancillary (preferred seating, business class, SpiceMax, loyalty programmes, insurance, meals, Spice Vacations, lounge, Visa, cab, cargo, onboard merchandise). It operates a low-cost model with >92% load factor and average aircraft utilization of 12 hours.

f Regional Connectivity: It makes 57 daily UDAN flights in 10 operational regional destinations.

f Growing Relationship: It has interline and codeshare agreement in place with Emirates. It also signed an MoU with Gulf Air to explore interline and codeshare agreement. It also has Amadeus as distribution partner.

Key Management

Name Designation Brief Profile

Mr. Ajay Singh CMD

Mr. Singh is a first-generation entrepreneur. He has extensive experience in the IT and airline operations having successfully contributed to the launch of the company in 2005. Prior to this, he served in government as advisor to the Ministry of Communication & Information Technology and the I&B Ministry. He was appointed as MD of the company on May 21, 2015. He successfully turnaround the company in 2015 by implementing several measures in the areas of revenue generation, cost management, customer retention and employee welfare etc.

Ms. Shiwani Singh Non-Executive Director Ms. Singh was inducted to the SJET’s board as Non-Executive Director in May 2015.

Mr. Anurag Bhargava Independent Director

Mr. Bhargava is the chairman and co-founder of IREO, one of the largest investment funds focused on real estate in India. He is also a co-founder of India Equity Partners (long-term PE fund). Mr. Bhargava, who is currently on the boards of US-India Business Council and Magic Bus USA, is also the Chairman of Yaantra and serves on the board of Overseers of University of Pennsylvania (School of Engineering). He completed a dual-degree programme in management and technology at the University of Pennsylvania.

Mr. Ajay Chhotelal Aggarwal

Independent DirectorApart from being an independent director of SpiceJet, Mr. Aggarwal is also on the board of Cricket Club of India, Multi-Media HRD and Viridis Chemicals etc.

Mr. Manoj Kumar Independent Director Mr. Kumar was inducted to the SJET’s board as Independent Director in May 2019.

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Shareholding Pattern


59.5

2.11.1

37.3Promoters

Mutual Funds

Foreign Institutions

Retail / Others

Key Institutional Shareholders

Institution Holding (%)

Nippon Life India Asset Management 1.15

BlackRock Inc 0.19

HDFC AMC 0.12

Dimensional Fund Advisors 0.07

Source: BSE

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Change in Ratings

f We have shifted to BUY & SELL ratings only and no longer continue with HOLD rating.

f We have also shifted to 2-year Target Price from 1-year Target Price earlier.

Rating Rationale

Market Cap BUY SELL

Large Cap >15% <15%

Mid/Small Cap >20% <20%



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